Gold and the related exchange traded funds are among this year’s best-performing assets, helped in part by expectations and delivery of interest rate cuts by the Federal Reserve, but the extent to which bullion is outperforming is something to behold.
Take the case of the VanEck Merck Gold Trust (OUNZ ) Backed by physical holdings of gold, which investors can take delivery of upon selling shares of the ETF, OUNZ is beating the S&P 500 by 650 basis points on a year-to-date basis. That showing and those of other gold ETFs imply the rate cuts were effectively priced in and that the yellow metal may be overbought for now, but that doesn’t the long-term case for having some exposure to gold.
In a recent report, Bank of America Global Research noted gold remains under-owned despite the fact that it’s an effective hedge owing to its negative correlations to U.S. stocks. The bank has favorable ratings on an array of physically backed ETFs.
‘Quintessential’ Hedge
The shifting macroeconomic environment could bode well for ETFs such as OUNZ, indicating these funds merit inclusion in a variety of portfolios.
“Gold is also the quintessential inflation hedge,” notes Bank of America. “In the 20th century, inflation across G7 economies averaged 5%. Between 2000 and 2020, the average rate was 2%. We regard the ‘2% world’ of macro stability and low inflation as a brief interregnum in an otherwise more volatile world. Trends in demographics, debt, tech disruption, and de-globalization all suggest a secular shift back to a 5% world.”
While near-term gains could be hard to come by due to exceptional performance notched earlier this year, gold could have more upside in store with BofA forecasting potential gains of 3% to 15%. A wide range to be sure, but even at the midpoint of that range, OUNZ would benefit.
Speaking of drivers for gold prices and ETFs such as OUNZ, global central banks remain dedicated buyers of the yellow metal.
“Nevertheless, support for prices is clear. Global central banks are on pace to have bought >3,000 tons from 2022 to the end of this year, the fastest clip in history,” adds BofA. “Central bank buying broke the old models of gold prices, as real rates are no longer a reliable indicator. But the PBoC stopped buying between $1,900 and $2,000 and retail investors have sold $25bn of gold ETFs since October 2020. Heavy demand from central banks and light retail positioning should provide support in a sell-off.”
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