The SPDR Gold Shares (NYSE:GLD), the world's largest bullion-backed exchange traded product, has hauled in over $9.3 billion in new assets this year. That is nearly $4 billion more than the next closes ETF.
There are several reasons why GLD and rival gold ETFs have regained investors' favor this year, including still low interest rates in the U.S. and lower or even negative rates throughout the developed world. While not the garden variety interest rate policy, negative interest rate policies (NIRP) are having a profound, mostly positive effect on gold.
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Although it appears unlikely the Federal Reserve will raise interest rates this month and the same can probably be said of July, the Fed is intent on boosting borrowing costs. Even it does, U.S. interest rates will still be nowhere to close to historical norms, indicating any punishment delivered to gold ETFs in the wake of rate hikes could be short-lived. Additionally, it looks like NIRP will remain throughout much of the developed world.
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Negative sovereign debt yields in Switzerland and Japan extend out to 10 years, while those in France and Germany are negative out to five years. Even interest rates in the US and UK are extremely low across the curve, with up to 2-year debt yielding less than 1%, according to the World Gold Council. In real terms, the picture is even bleaker. Only yields in the UK are positive for maturities shorter than 3 years and just a few long-term sovereign bonds yield more than 1%.
As is often the case when bullion and ETFs such as GLD get on a torrid pace and start hauling in billions of dollars in new assets, concerns are rising that gold's recent rebound is too much of a good thing, and there are plenty of naysayers willing to chime in with a bearish bullion view.
Gold often falls out of favor when investors chase stocks when stocks are hot, but popular equity-based broad market ETFs are dithering this year.
Gold offers further enticement as a whopping $8 trillion in global investment-grade sovereign debt currently sports negative yields, meaning investors that make those bets will lose money. The World Gold Council adds 40 percent of global sovereign debt sports yields below one percent.
While low rates reduce the opportunity cost of holding gold, negative interest rates magnify this. Under NIRP, it now costs little, if anything, from an opportunity cost perspective,to hold gold. This could drive gold demand, said the World Gold Council.
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