Rate Cuts: Unlocking Safe-Haven ETF Potential

"Gold and silver are not naturally money, but money is naturally gold and silver." Common economic knowledge tells us that gold and other precious metals have a very important attribute - value preservation. From ancient times to the present, gold and other precious metals have been the safe-haven assets for people during turbulent times.

Looking at the long timeline, it is almost certain that the Federal Reserve will cut interest rates. After the Lunar New Year, the price of gold has been rising all the way, and in May, the price of gold once broke through 2400 USD, reaching a new historical high. What kind of investment logic does this contain?

When looking for speculative opportunities that interest rate cuts bring to the precious metal market, we first need to understand how precious metals are priced and what factors can affect the price of precious metals in order to further analyze how interest rate cuts can benefit the prices of precious metals. Taking gold as an example, the factors affecting its pricing are nothing more than two points: the intrinsic real value of gold and the opportunity cost of holding it.

The so-called real value is the premium enjoyed by holding gold, mainly reflected in three dimensions: the unit of value, supply and demand relationship, and fair hedging.

Unit of Value: Gold is usually opposed to the value of major currencies (such as the US dollar). When the currency value decreases, the function of gold as a store of value is enhanced, and the price rises accordingly.

Demand Relationship: As a commodity, the value of gold is fundamentally affected by supply and demand: if demand exceeds supply, the value rises, and vice versa, it will decrease.

Fair Hedging: "In prosperous times, collect antiques; in troubled times, buy gold." When interest rate cuts and other events shake the foundation of the modern monetary system, the attribute of gold as a value-preserving asset will be revealed, driving up its price.

The so-called opportunity cost is the "lost income" from holding gold. It is mainly reflected in two aspects: the inherent disadvantage of zero-coupon assets and weaker liquidity than currency.

Zero-coupon assets: Gold cannot generate interest after being held, so the opportunity cost of holding gold is the coupon income that can be brought by investing in interest-bearing assets (stocks, bonds, etc.). To a certain extent, the price of gold is the shadow of the real interest rate, and short-term price fluctuations of gold are mostly due to market expectations of bond yields.

Weak liquidity: Although gold has a grandfather-like monetary attribute, it is not the mainstream of the times. Once a liquidity crisis occurs, various transactions and investment behaviors will drive up the demand for cash, and gold will lose in the competition of liquidity, with the price being under pressure.

In summary, when we judge the investment opportunities that interest rate cuts bring to gold and other types of precious metals, we can also approach from these factors.

As mentioned above, "the price of gold is the shadow of the real interest rate." Once the Federal Reserve cuts interest rates, the nominal interest rate will drop in the first place, accompanied by the high inflation level in the United States, and the decline in the real interest rate will be a foregone conclusion.

Therefore, in this situation, the attractiveness of interest-bearing assets such as bonds and stocks compared to gold will decline significantly, and investors will be more inclined to hold various safe-haven assets - the prices of gold and other precious metals will continue to rise; at the same time, various assets in the market and banks around the world will vigorously buy gold and other precious metals to seek stability, and the market will be in short supply, further driving up its price.

Chart: The relationship between gold prices and US real interest rates (2022-2023)

After clarifying the speculative opportunities that interest rate cuts bring to gold and other precious metals, the following introduces some investment products related to precious metals in the US stock market, which investors can choose according to their needs.

In previous articles, we have been talking about that for the majority of investors, compared with directly investing in stocks and futures, ETFs are a safe and diversified investment product. Next, we will introduce the top five gold ETFs in the US stock market by market value for your reference.

As of May 27, the asset size of GLD has reached 65.238 billion USD, with a nearly 13% increase from the beginning of the year, and its trading fee rate is 0.4%.

Advantage: Directly linked to the gold price, with a large asset size and extremely strong liquidity, suitable for high-frequency large transactions.

Disadvantage: The trading fee rate is relatively high (0.4%), and the long-term investment return may be affected.

Advantage: IAU's cost is lower than GLD (the trading fee rate is only 0.25%), suitable for investors in medium to long-term asset allocation.

Disadvantage: Although the reputation is high, it is still not as good as GLD, and the liquidity is relatively weak.

Advantage: The trading fee rate is very low (0.18%), suitable for long-term investors.

Disadvantage: The fund size is less than one-third of IAU and one-fifth of GLD, and the liquidity is far less than the previous two ETFs.

Advantage: Can enjoy the benefits brought by both the rise in gold prices and the performance growth of gold industry companies.

Disadvantage: The trading fee rate is relatively high (0.51%), which is not conducive to medium to long-term investment returns.

As of May 27, its asset size is 14.518 billion USD, and the trading fee rate is 0.51%. The increase from the beginning of the year is 13.71%. The product's holdings include well-known mining companies such as Newmont Mining and AEM.

Advantage: Similar to GDX, it can obtain benefits from both the rise in gold prices and the performance growth of companies.

Disadvantage: The investment is in small and medium-sized mining companies, with an asset size of less than half of GDX, and the fee rate is not low (0.5%).

As of May 27, its asset size is 5.462 billion USD, and the trading fee rate is 0.5%. The increase from the beginning of the year is 17.65%. The product's holdings include small and medium-sized mining companies such as AGI and Harmony Gold.

Due to the relatively few silver ETF products in the US stock market, we have selected the top three silver ETF products by market value for your reference.

Advantage: The largest existing asset size of silver ETF, providing good liquidity for investors.

Disadvantage: The management fee rate is relatively high (0.50%), and there may be a certain accumulation of costs for long-term holding.

Advantage: Compared to SLV, the fee rate is lower (0.30%), which can save trading costs.

Disadvantage: The asset size is smaller, and liquidity is lower.

As of May 29, SIVR's asset size is about 1.429 billion USD, with a trading fee rate of 0.30%, and the increase from the beginning of the year is 35.16%.

Advantage: The components cover well-known silver mining companies in Canada, Russia, the United States, and other countries, including Wheaton Precious Metals (WPM), Pan American Silver (PAAS), etc.

Disadvantage: The trading fee rate is 0.65%, which is the highest among the three ETFs, and the stock price performance will be affected by the operating conditions of silver mining companies.

As of May 29, SIL's asset size is about 1.214 billion USD, with a trading fee rate of 0.65%, and the increase from the beginning of the year is 28.2%.

Similar to the silver market, the following are the top three copper mining ETFs in the US stock market, which can be used as an investment reference.

As of May 29, CPER's asset size is about 232 million USD, with a trading fee rate of 0.65%, and the increase from the beginning of the year is 23.86%.

Advantage: Directly tracks copper prices, suitable for investors with a clear view of the copper market.

Disadvantage: The market value is smaller, liquidity may be limited, and the fee rate is high (0.65%).

Advantage: Provides a broad investment portfolio of global copper mining companies, including KGHM (Polish Mining Group), First Quantum Minerals (FM), etc.

Disadvantage: The fee rate is relatively high (0.65%), and the product performance is affected by the operating conditions of copper mining companies.

As of May 29, COPX's asset size is about 2.7 billion USD, with a trading fee rate of 0.65%, and the increase from the beginning of the year is 34.56%.

Advantage: The holdings cover multiple copper mining companies, including well-known companies such as Southern Copper and Freeport-McMoRan; the fee rate is lower (0.47%), suitable for long-term holding.

Disadvantage: The listing time is less than one year, and the market value is smaller compared to established ETFs like COPX, with lower liquidity.

As of May 29, CPER's asset size is about 25.5 million USD, with a trading fee rate of 0.47%, and the increase from the beginning of the year is 30.67%.