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 last 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 dollar-denominated gold more expensive for overseas buyers.
That dynamic has already emerged in the market. Reuters reported earlier this week that gold was trading near $4,291 an ounce as investors weighed expectations for further Fed tightening against declining oil prices.
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.
North American gold ETF buying also surged in August, with reported net purchases jumping to $7.7 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. GLD had about $144 billion in assets versus roughly $63.5 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.
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