Why Gold Could Be Poised to Benefit From Fed Tightening Cycle

February 7, 2022

During calendar year 2021, commodities experienced net outflows of $4.2 billion. Among the biggest asset-losing ETFs of the year were a handful backed by gold bullion.

However, with inflation looking a lot “stickier” than expected, and with infrastructure projects around the country set to begin thanks to the $1.2 trillion Bipartisan Infrastructure Law, it appears 2022 could bring a reversal of fortune for commodity and metals funds.

We believe gold funds look particularly attractive right now. But why?

Gold has historically performed well in times of not only higher inflation but also rising rates, according to the World Gold Council (WGC). If we look at the past four Federal Reserve tightening cycles, between February 1994 and December 2015, the yellow metal underperformed in the months leading up to the Fed’s first rate hike but then outperformed U.S. stocks and the dollar six months and one year following liftoff.

The reason for this? The WGC believes a weaker greenback may have given a boost to gold, for one. And two, U.S. stock returns were not as strong as they were before the rate hike, which may have also favored gold as an attractive alternative.

This might suggest that the time to buy may be now, potentially less than two months before the Fed says it will take action. As always, we believe a 10% portfolio weighting in gold is prudent, with 5% in physical bullion and 5% in high-quality gold mining stocks, mutual funds and ETFs.

Ready to gain exposure to a wide-ranging portfolio of companies within the gold mining industry, including production and gold royalty companies? Click here to explore the GOAU ETF today!

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor

Please carefully consider a fund’s investment objectives, risks, charges, and expenses. For this and other important information, obtain a statutory and summary prospectus for GOAU here. Read it carefully before investing.

Disclosures: Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemed from the funds. Brokerage commissions will reduce returns. Because the funds concentrate their investments in specific industries, the funds may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries. The funds are non-diversified, meaning they may concentrate more of their assets in a smaller number of issuers than diversified funds. The funds invest in foreign securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. These risks are greater for investments in emerging markets. The funds may invest in the securities of smaller-capitalization companies, which may be more volatile than funds that invest in larger, more established companies. The performance of the funds may diverge from that of the index. Because the funds may employ a representative sampling strategy and may also invest in securities that are not included in the index, the funds may experience tracking error to a greater extent than funds that seek to replicate an index. The funds are not actively managed and may be affected by a general decline in market segments related to the index. Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political, or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

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