Investors seeking to diversify equity-heavy portfolios have been largely disappointed by bonds this year. Still, commodities have picked up much of that slack. Precious metals, including gold, are part of that conversation.
Take the case of the VanEck Merck Gold Trust (OUNZ ) – a gold-backed exchange traded fund that’s higher by nearly 14% year-to-date. Under any circumstances, an almost 14% gain by a gold ETF in barely more than six months of trading is impressive. It’s even more so when considering the Federal Reserve has yet to lower interest rates – a move widely expected to be a catalyst for bullion.
While the Fed hasn’t obliged in terms of lower rates, the yellow metal and ETFs such as OUNZ have been buoyed by other catalysts – namely strong investment demand with much of it coming from outside the U.S.
Usual Suspects Boosting Gold Demand
In what could be good news for OUNZ over the back half of 2024, Chinese investors and global central banks remain dedicated buyers of bullion.
“Gold investment demand in China and central banks has risen to 85% of mine supply during 1Q’24 and averaged more than 70% of mine supply over the past two years,” according to Citi analysts.
The bank added that investment demand has essentially washed away the headwind of high real interest rates in the U.S. More potential good news for OUNZ: Citi forecasts that global gold demand over the next 12 to 18 months will be in excess of mined supply. Said another way, gold demand will outstrip supply.
However, Fed rate cuts are part of the equation and that could soon turn in favor of bullion and ETFs like OUNZ with Citi forecasting eight consecutive rate reductions by the Fed starting at the central bank’s September meeting. Citi says there are potential catalysts that could drive gold to new highs in 2025, including the possibility that former President Trump reclaims the White House in November.
“These include potential Trump trade tariffs, US fiscal policies aimed at inflating away debt, and geopolitical tensions such as conflicts in the Middle East. However, Citi notes that risks to their bullish forecast include weaker-than-expected China retail demand, reduced central bank demand, or delays in Fed interest rate cuts,” reported Sam Boughedda for Investing.com.
Past performance isn’t a guarantee of future returns, but OUNZ gained about 54% from the time Trump took office in January 2017 until he left four years later.
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