Gold's Recent Malaise Could Spell Opportunity

Gasp. The SPDR Gold Shares GLD, the world's largest gold-backed exchange traded fund, is lower by 2.17% in the fourth quarter.

What Happened To GLD

Some of the air has come out of the gold trade as the dollar has remained peskily sturdy and as investors have gravitated toward riskier assets. Still, there's no denying that GLD is up 14.38% year to date, cementing gold's status as one of this year's best-performing commodities.

GLD may have hit a bump in the road as its recent price action suggests, but a broader view of gold suggests the decline isn't likely to be severe and could give way to more upside.

“In actuality, there is a confluence of short-term and long-term macroeconomic drivers working together that influence gold’s fundamentals (both cyclical and counter-cyclical sectors) which in turn impact the gold price,” State Street said in a recent note.

Why It's Important For Gold

As has been widely noted, falling interest in the U.S. and in other developed markets have been among the primary catalysts driving gold and the related ETFs higher this year. That's good news because while past rate cuts are baked into the gold price today, more rate reductions could be in store in 2020.

“Lower global growth expectations, a prolonged trade dispute between the US and China, and an inversion of the yield curve have shifted the positive interest rate trajectory 180 degrees,” State Street said. “Since the start of this year, real interest rates have collapsed (dipping below zero in Q3 2019), with the Fed and ECB changing course back to accommodative monetary policies.”

In other words, lower rates around the world are definitely one reason why GLD has hauled in $5.5 billion in new assets this year.

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What's Next For Gold

If global central banks insist on lowering rates with some doing so into negative territory, the answer to what's next for gold could come easily.

“Against this interest rate backdrop, defensive positioning by investors is on the rise, which is supporting gold’s upward price movement in several ways,” State Street said. “As global uncertainty has risen, investors have responded according to conventional wisdom, turning to fixed income markets for both safety and stability.

"But with continued low rates, the traditional playbook may not best serve investor objectives going forward. From this perspective, gold’s rally may continue to find support from the attractive relative valuations and improvement in opportunity cost associated with gold.”