Forecast Trend Report by Period
Currency-hedged gold futures ETF gained 8.4% in August, while spot gold funds returned just over 5%
Lower rates and a weaker dollar tend to support gold; real yields are the key gauge
‘H’ products benefit when the won strengthens; silver has more upside torque but also more volatility
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Gold and silver prices have rebounded, helping related exchange-traded funds recover quickly. But even products tied to the same precious metals showed return gaps of about 3 percentage points over the past month. As the won strengthened, currency-hedged futures ETFs outperformed spot products with exchange-rate exposure.
According to the Korea Exchange on September 1, KODEX Gold Futures(H) rose 8.41% in August. Over the same period, ACE KRX Gold Spot gained 5.16% and TIGER KRX Gold Spot advanced 5.22%. The currency-hedged gold futures ETF outperformed domestic spot gold ETFs by about 3.2 percentage points.
Silver showed a similar pattern. KODEX Silver Futures(H) jumped 13.19% over the past month. TIGER Silver Active, which is exposed to currency moves, climbed 10.46%, while 1Q Silver Active rose 9.47%. Silver showed stronger upside momentum than gold.
Won Strength Split Returns
One factor behind the return gap was the won-dollar exchange rate. While international gold and silver prices rose, the won also strengthened. For products with currency exposure, gains in global bullion prices shrink in won terms when the won-dollar rate falls.
Currency-hedged products use instruments such as won-dollar futures to reduce that impact. They are relatively advantageous when metal prices are rising at the same time the won is strengthening. By contrast, if gold rises while the won weakens, products with currency exposure can benefit from both bullion gains and foreign-exchange gains.
Still, the recent performance gap should not be attributed solely to hedging. KODEX Gold Futures(H) tracks international gold futures, while ACE KRX Gold Spot and TIGER KRX Gold Spot follow domestic spot gold prices. Silver ETFs also differ by product, with some tied to futures and others to spot-linked assets. Spot-futures price gaps, rollover gains or losses, pricing discrepancies between domestic and overseas markets, and tracking error also affect returns.
Does Gold Rise When Rates Fall?
Interest rates are one of the main drivers of gold prices. Unlike bonds or deposits, gold pays no interest. When rates rise, interest-bearing assets such as bonds become more attractive, increasing the opportunity cost of holding gold. When rates fall, that burden eases and often supports prices.
Markets pay particular attention to real yields, or nominal rates minus inflation, rather than nominal yields alone. When real yields fall or turn negative, the real purchasing power of cash and bonds can erode, making gold relatively more attractive. That is one reason gold often strengthens when expectations build for Federal Reserve rate cuts.
The dollar also tends to move inversely to gold. International gold prices are denominated in dollars. When the dollar weakens, gold becomes relatively cheaper for investors using other currencies such as the euro or yen. That can lift demand and support prices.
Still, falling rates do not automatically mean higher gold prices. In periods of financial stress or geopolitical risk, the dollar and gold can rise together on safe-haven demand. Central-bank gold purchases and flows into and out of ETFs are also important drivers alongside rates and currencies.
When Should Investors Buy Gold?
A favorable backdrop for gold typically combines lower interest rates, falling real yields and a weaker dollar. Investors may also want to watch for periods when the Fed appears more likely to end tightening and shift to easier monetary policy. Gold can also be used to increase the safe-haven share of a portfolio when recession risks, market stress or geopolitical tensions intensify.
By contrast, gold tends to face headwinds when inflation reaccelerates, prompting the Fed to raise rates and pushing up U.S. Treasury yields. A stronger dollar on top of that would add a second negative factor for gold.
There are also calls for caution on chasing the rally. Gold and silver have already climbed sharply over the past month, and uncertainty over U.S. monetary policy has increased again. On August 31, KODEX Gold Futures(H) fell 3.19% and KODEX Silver Futures(H) dropped 3.82%.
To gauge where gold may head next, investors need to watch U.S. consumer inflation, employment data, the Fed’s rate outlook, U.S. real Treasury yields and the dollar index together. If hiring and growth slow, lifting expectations for rate cuts, while real yields and the dollar fall in tandem, that would create a supportive environment for gold.
Product selection depends on the currency outlook. If investors expect gold to rise while the won strengthens, currency-hedged products may be more advantageous. If they expect gold to rise alongside a weaker won, products with currency exposure may be worth considering. Investors seeking lower volatility may want to focus on gold, while those willing to accept bigger price swings for greater upside may use silver for part of their allocation.
A fund-management official said investors should not invest simply on the expectation that gold prices will rise, because gold moves with U.S. rates, the dollar and the won-dollar exchange rate. Domestic ETF investors should also check whether a product carries the “(H)” label and whether it tracks spot or futures prices, the person added.
Jeon Ye-jin, Korea Economic Daily reporter ([email protected])
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