GLD, IAU ETFs boosted by gold prices: pattern points to a reversal

The SPDR Gold Shares (GLD) and the iShares Gold Trust (IAU) have done well this year, helped by the recent gold price breakout. GLD and IAU have risen by almost 20% this year, outperforming the S&P 500 index, which has jumped by 17%.

However, the two funds have lost assets, with the IAU net outflows soaring to $2.4 billion while GLD has shed over $936 million. Their total assets stand at over $68 billion and $29 billion, respectively. 

Gold has numerous tailwinds

Gold has become one of the best-performing metals this year as it soared to a record high of $2,531 earlier this week. It has also jumped by over 60% in the past five years, beating other industrial metals like copper, platinum, and palladium. Palladium has crashed by over 30% in this period. 

Gold’s rally has happened for numerous reasons, which could continue playing out in the next few years.

The first one is that the US debt has exploded higher in the past few years. When Barrack Obama became president in 2008, the US had about $10 trillion in public debt. Now, 16 years later, the debt has jumped to over $35.2 trillion.

The US is adding over $1 trillion in public debt every 100 days, a pace that many experts believe is highly unsustainable. 

Worse, the government does not have a plan to reduce this heavy debt load. Analysts believe that cutting the deficit would need two things: revenue raising (tax hikes) and spending cuts. 

In a divided government, it is highly impossible that the US will increase taxes. At the same time, politicians in Congress have become addicted to spending, meaning that the public debt will continue soaring. The Congressional Budget Office (CBO) has estimated that the US debt will get to over $50 trillion in the next decade. 

The soaring debt load means that the US will continue spending over $800 billion in interest payments alone. 

Gold and central bank demand

The other important catalyst for gold is that central banks are in an acquisition spree as the trust in the US and the greenback are fading.

The main catalyst for these acquisitions happened in 2022 when Russia invaded Ukraine, leading to heavy sanctions on Russia. In that period, the US also placed sanctions on the Russian central bank, locking access to billions of dollars.

Now, Russia, China, and other central banks that have always held their reserves in dollars have changed their tone and moving to gold. Analysts expect that central banks will continue accumulating gold in the foreseeable future. 

Federal Reserve rate cuts

Meanwhile, the XAU/USD price has jumped as expectations that the Federal Reserve will start cutting interest rates jump. 

The case for cuts has become clearer as recent data showed that the economy was not doing good. Just this week, the Bureau of Labor Statistics (BLS) revised its jobs numbers released in the twelve months to May. 

Another report released by S&P Global on Thursday showed that the manufacturing PMI dropped from 49.6 in July to 48 in August. This report matched last week’s data that showed that manufacturing and industrial production dropped sharply in July. 

Therefore, analysts expect the Federal Reserve will start cutting interest rates as soon as in its September meeting. Jerome Powell will provide more color about this in his closely watched Jackson Hole Symposium in Wyoming. 

Gold price analysis

Gold has other fundamental tailwinds. However, technically, there are chances that the metal may suffer a deep reversal in the coming months. 

On the weekly chart, we see that gold has remained above the 50-week and 25-week moving averages, meaning that bulls are in control. 

However, it has also formed a dangerous pattern known as a rising wedge. This pattern has been formed by connecting the highest swings since April 8 and the lowest points since June 3. 

With the two lines nearing a confluence level, there are signs that gold, which has become a crowded trade, will suffer a deep reversal as investors start taking profits. If that price action happens, gold will then drop to about $2,280, its lowest point in April. Also, it means that the IAU and GLD ETFs will also drop.

No good reason to buy GLD ETF

The other thing worth noting is that while GLD and IAU have five-star ratings by Morningstar, there is no good reason to invest in the bigger GLD ETF. 

GLD and IAU are similar ETFs that own gold. However, GLD is a more expensive fund as it has an expense ratio of 0.40% while IAU charges 0.25%. The 0.15% is substantial, especially when you look at it in a long period. 

Assume that you are investing $100,000, you will pay $400 if you invest in GLD and $25o if you invest in IAU. If you hold the trade for a decade, and all factors constant, your fees will be $4,000 and $2,500, respectively.