Repeated Market Turbulence & the Allure of Gold ETFs

Believe it or not, for a variety of investors, gold seems to be a refuge during economic kerfuffle. Market turbulence, often driven by dreaded inflation, can paradoxically be a boon for this precious metal. If you’re wondering exactly how, Nick Peters-Golden, a fellow scribe over at VettaFi, offers some insights. According to Peters-Golden, gold’s value holds steady while the U.S. dollar’s power is hampered by inflation. 

Gold’s Historical Hate-Love Affair With Inflation

Not many would think this translates into a longer-term investment strategy, but it largely rests on how the Federal Reserve responds to inflation. Historically, when the Fed refrains from cutting rates during times of high, albeit slowly decreasing inflation, gold usually fares well. According to the US Gold Bureau, this suggests that gold ETFs could be useful in our investment toolkit as a bulwark against inflation. But here’s what’s surprising – gold shines most brightly when it’s treated as a long-term holding rather than an investment as quick as a cat. 

A Counter-Narrative to Gold Being a Good Hedge Against Inflation  

However, another VettaFi writer, Karrie Gordon, offers a counter-perspective, arguing that gold ETFs might not be the best option for long-term investing. She points to some historical data showing gold’s underperformance during distinct periods of high inflation. If you really think about it, a genuine inflation hedge should maintain stability irrespective of inflation movement. But in the case of gold, its relationship with the Consumer Price Index had exhibited significant fluctuations. In other words, it’s not all glitter and gold for this shiny metal as a bulletproof inflation hedge.  

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Gold ETFs, much like any other market investment, carry their own set of distinctive potentials and risks. While they can provide detailed exposure to the gold market without the need for direct asset allocation, they also expose the investor to potential movements in inevitably turbulent markets. Gold ETFs, despite being inherently linked to the general course of precious metal prices, are affected by a range of diverse factors. It’s not simply a matter of increased inflation leading to rising gold prices, and therefore a higher return on investment for those holding gold ETFs. 

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