Published on 25 May 2023 on Zacks via Yahoo Finance
How to Trade the Gold Rush With ETFs
Gold price has been on a roller-coaster ride in recent weeks. While the debt-ceiling impasse, bets on Fed rate hike pause and recession fears are driving gold higher, a stronger dollar and rise in yields are weighing on the yellow metal.
Factors Driving Up Gold Price
Gold has become extremely popular this year as investors seek to shield their portfolios from persistent inflation and other economic issues like recession fears and banking turmoil. The debt default fears have further boosted demand for bullion as a safe-haven investment.This is especially true as another round of deal talks between representatives of U.S. President Joe Biden and congressional Republicans to raise the government's $31.4 trillion borrowing limit ended with no progress. Republicans, led by Mr. McCarthy, are demanding more than $4 trillion in spending cuts in return for raising the ceiling. Democrats have refused and instead are offering to keep spending flat.If the United States, nearing the Jun 1 deadline, defaults on its debt, it will run out of cash to pay its bills and could not borrow any more money. A default on its debt would likely mean a recession for the U.S. economy, thus raising the demand for gold. Notably, gold is often used as a means of preserving wealth during times of financial and political uncertainty. It usually does well when other asset classes struggle. It also acts as an inflation hedge (read: Here's Why Safe Asset ETFs Could Surge Again).Additionally, moderating inflation has prompted bets that the Federal Reserve is nearing the end of its rate-hike cycle. Per CME FedWatch Tool, markets have priced in a 74% chance the Fed pauses rate hikes at its June policy meeting and a 40% chance the Fed could cut rates 25 basis points in November. The yellow metal is highly sensitive to rising U.S. interest rates, as these increase the opportunity cost of holding a non-yielding bullion. A pause or slowdown in the pace of rate hikes will lift gold prices higher.