Gold Is Up 17%, But the Fed Just Changed the Game for GLD and IAU
Gold’s strong run is facing a fresh test from higher interest rates, but recent ETF flows suggest investors have not abandoned the precious-metal trade. The Federal Reserve raised its policy rate by 25 basis points l ast week to 3.75%-4%, its first hike since July 2023. The move strengthened the dollar and pushed Treasury yields higher, putting pressure on non-yielding gold. Yet gold remains substantially higher over the past year. For investors accessing the metal through ETFs, the competing forces are particularly relevant for SPDR Gold Shares (NYSE: GLD ) and iShares Gold Trust (NYSE: IAU ), which provide exposure to physical gold. Higher Yields Create a Near-Term Hurdle "Last week’s Federal Reserve decision has definitely created a headwind for gold in the short term," said Rick Kanda, managing director at The Gold Bullion Company. Kanda pointed to the opportunity cost of holding an asset that generates no income when rates and bond yields are rising. "Gold doesn’t generate interest, so when interest rates and bond yields rise, investors are more keen to hold yield-bearing assets as opposed to gold," he said. A stronger dollar can add another layer of pressure because it makes
Gold’s strong run is facing a fresh test from higher interest rates, but recent ETF flows suggest investors have not abandoned the precious-metal trade. 75%-4%, its first hike since July 2023. The move strengthened the dollar and pushed Treasury yields higher, putting pressure on non-yielding gold. Yet gold remains substantially higher over the past year.
For investors accessing the metal through ETFs, the competing forces are particularly relevant for SPDR Gold Shares (NYSE: GLD ) and iShares Gold Trust (NYSE: IAU ), which provide exposure to physical gold. Higher Yields Create a Near-Term Hurdle "Last week’s Federal Reserve decision has definitely created a headwind for gold in the short term," said Rick Kanda, managing director at The Gold Bullion Company. Kanda pointed to the opportunity cost of holding an asset that generates no income when rates and bond yields are rising.
"Gold doesn’t generate interest, so when interest rates and bond yields rise, investors are more keen to hold yield-bearing assets as opposed to gold," he said. A stronger dollar can add another layer of pressure because it makes dollar-denominated gold more expensive for overseas buyers. That dynamic has already emerged in the market. ETF Demand Remains a Key Support The rate backdrop has not, however, erased demand for gold ETFs.
The World Gold Council said August was the third-strongest month for gold returns in 25 years, with ETF buying among the major contributors to the rally. 7 billion from $71 million in July, although rising real yields now pose a test for whether that momentum can persist. GLD remains the larger of the two major physically backed funds, while IAU offers similar exposure at a lower sponsor fee. 5 billion for IAU.
Their one-year returns are also broadly similar, at around 14%. Fed, Yields and Dollar Set the Next Leg Kanda expects volatility to remain elevated if markets continue pricing another rate increase. "I wouldn’t be surprised to see gold experience more volatility in the short term," he said, adding that inflation, employment and energy-price data could all influence expectations for the Fed’s next move. "For gold investors, the key things to watch over the coming months will be the Fed’s next moves, inflation data, US Treasury yields and the strength of the US dollar," Kanda said.
For gold ETFs, that leaves the market caught between a still-strong longer-term demand backdrop and a monetary-policy environment that has become less supportive. A moderation in rate-hike expectations could ease pressure on GLD and IAU, while further increases in yields and the dollar could extend the recent volatility. Read Also: Biotech ETF XBI Hits an Interest Rate Wall as 40+ Catalysts Approach Photo: Shutterstock