Gold, a quintessential safe haven in economic and market crises, declined in price in the last few days. With a number of factors at play, the short-term pullback will likely meet resistance to the long-term, unchanged fundamentals, making it worth consideration this year.
Setting the Stage
This year ushers in arguably one of the most uncertain periods of investing in the modern era — outside of the COVID-19 global pandemic. Despite being armed with access to nearly unlimited amounts of data at any given moment thanks to the internet, advisors and investors find themselves with little helpful guidance on short-, medium-, or long-term economic or market expectations.
The announcement of blanket 10% tariffs on U.S. imports and additional tariffs on 50+ countries after close of market last Wednesday continues to rock global markets. Asia indexes hit a tailspin in Sunday overnight trading, tripping circuit breakers that temporarily halt sharp price movement. Russell 2000 futures also tripped a circuit breaker overnight Sunday.
The market crash in the wake of the U.S. tariff bombshell last week follows a trend of elevated volatility on constantly shifting and often nebulous economic policies from the current administration. It’s the culmination of that uncertainty and also fear for global trade impacts that led to the market crash this month.
“This kind of regime shift is so unprecedented that the historical data and models derived therefrom are only a best guess,” explained Preston Caldwell, Morningstar senior U.S. economist.
The times of limited information delivered by carrier pigeon feel less fraught than investors trying to make informed decisions in today’s markets of information overload. Take the 15-minute market chaos that happened Monday morning on rumors of a 90-day pause on tariffs. The report, picked up rapidly by news agencies and resulting in a sharp rise in stocks, proved unsubstantiated within a short period of time. Stocks collapsed on White House refutations of any delays to tariffs. Greater access to data and information continues to prove as harmful as it may be helpful this year.
Recent Price Action in Gold
With so much uncertainty, investors are fleeing to safe havens. The quite literal “golden child” of safe havens, gold hit a new all-time high last Thursday. Spot gold climbed to $3,167.57 an ounce but retreated over the weekend and into Monday, reported Reuters.
So why did gold prices fall? While a number of factors come into play, it likely comes down to two main reasons. Investors, fearing global recession, surged into other safe havens, such as the U.S. dollar. The Japanese yen and Swiss franc also appear well-positioned in evolving global trade tensions. “Both the Japanese yen and Swiss franc are good currencies to help mitigate the visceral reaction of the market to tariffs,” Matt Orton, head of advisory solutions and market strategy at Raymond James Investment Management, told CNBC.
The other likely culprit for gold price declines could be institutional investors liquidating their gold holdings according to CNBC. The market crash of recent days would have triggered margin calls for many investors. Buying stocks on margin entails borrowing money from a brokerage to purchase stocks. In return, investors must meet a maintenance margin requirement level where they supply collateral in the form of cash or securities.
When prices crash, a margin call is triggered, requiring that investors deposit more funds or securities until the maintenance margin level is met once more. The market plummet of the last few days would have triggered margin calls for those investors with margin accounts. Given gold’s price rally in the last eight months, it would have been an attractive means of quickly and easily liquidating positions to raise cash or to meet margin calls.
Fundamentals Remain Strong
That said, short-term selling doesn’t change the fundamental nature of why gold remains a preferred safe haven. With an established history of stable prices across market and economic environments, protection from inflation, and diversification from equities and bonds, it’s the gold standard safe haven for a reason.
"Once the dust settles, the rising recession risks, a weaker dollar, lower real yields and bigger rate cut expectations will all play their part in supporting a rebound (in gold)," Ole Hansen, head of commodity strategy at Saxo Bank, explained to Reuters.
Spot Gold ETFs Remove the Hassle of Investing
Investors looking to gain targeted access to the precious metal can do so through two different approaches: spot gold or futures. ETFs provide the added benefit of removing the need to custody physical gold, or insuring it.
The SPDR Gold Shares (GLD) remains the juggernaut within the class, with nearly $90 billion in AUM and an expense ratio of 0.40%. For those more cost conscious, the iShares Gold Trust Micro (IAUM) seeks to track the price of gold, with shares reflecting a fraction of the price of an ounce of gold. OUNZ invests in physical gold but has a management fee of just 0.09%, making it the lowest-cost gold ETF available.
Advisors and investors wanting the flexibility to convert into physical gold might consider the VanEck Merk Gold ETF (OUNZ). The fund has a management fee of 0.25% and allows investors to take physical deliveries in gold. If they take the physical delivery option, it doesn’t trigger tax events, as it's claiming what the investor already owns.
Income-oriented investors may look to a fund such as the FT Vest Gold Strategy Target Income ETF (IGLD). A futures-based strategy, it seeks to provide consistent income by capturing the price returns of GLD using FLEX options and U.S. Treasuries. The fund carries an expense ratio of 0.85%.
Those investors with a higher risk appetite could consider leveraged funds like the ProShares Ultra Gold (UGL). The fund seeks to offer twice the daily performance of the Bloomberg Gold Subindex. This amplifies potential gains as well as losses with returns. As with any leveraged funds, it is meant to be held on a daily basis, with distortions in returns when held for longer periods, as well as elevated risks.
For more news, information, and strategy, visit ETF Trends.
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