IAU: The Latest Fed Minutes Are Supportive For Gold

The IAU ETF is up 12.06% since October 2018, as the Fed has turned increasingly dovish.

The latest Fed minutes reveal how the Fed's economic outlook has become more uncertain, which will result in more dovishness for the foreseeable future.

Various Fed members have come out to express their view that the US economy may not need more rate hikes amid weakening economic conditions.

The iShares Gold Trust (IAU) ETF has rallied by about 12.06% since October 2018. The performance of gold is strongly inversely correlated to movements in the US Dollar, because the metal is a dollar-denominated commodity. The weaker the USD becomes, the less expensive it becomes to buy gold. While the Fed isn't the only driver of the USD/ gold price, dovish guidance from the central bank has certainly played an essential role in driving the price of gold higher lately. The chart below demonstrates the inverse correlation between the US Dollar Index (green line) and IAU (blue line). This article assesses the latest developments to determine why support for gold prices and the IAU ETF could remain intact for the foreseeable future.

Source: Yahoo Finance

Prospectus Review

IAU tracks the price of gold by using the "LBMA Gold Price" as its underlying benchmark. The fund offers this exposure by holding physical gold in its portfolio. It seeks to offer a more convenient mechanism to invest in gold as an alternative to having to transport and store physical gold.

Risk note from prospectus:

Because the Trust does not have any income, it needs to sell gold to cover the Sponsor's Fee and expenses not assumed by the Sponsor. The Trust may also be subject to other liabilities (for example, as a result of litigation) that have also not been assumed by the Sponsor. The only source of funds to cover those liabilities will be sales of gold held by the Trust. Even if there are no expenses other than those assumed by the Sponsor, and there are no other liabilities of the Trust, the Trustee will still need to sell gold to pay the Sponsor's Fee. The result of these sales is a decrease in the amount of gold represented by each Share.

The reason I have chosen this ETF is because it offers a convenient investment vehicle through which exposure to physical gold can be achieved. Moreover, out of all ETFs that offer exposure to physical gold, this ETF has one of the highest Assets Under Management (AUM) according to ETFdb.com, currently standing at $12.4 billion. I consider AUM as a good indicator for how successful the fund has been in implementing its strategy to deliver on its objectives for investors. The higher its AUM, the more investors have allocated their capital towards the fund due to effective management. Furthermore, it has the highest average trading volume, presently at 14.5 million. Hence this means that the ETF has a very healthy level of liquidity. This is a good indicator for how easily investors can buy and sell shares in the ETF. Therefore, the higher the trading volume, the lower the liquidity risks.

Fed Minutes

The Fed recently released the minutes from its Jan. 30 FOMC meeting, which revealed how the Fed's outlook for the economy has become very uncertain, and that they see more downside risks now, encouraging them to adopt a more dovish approach.

The latest Fed minutes read:

At the time of the December meeting, the Committee had noted that it would continue to monitor global economic and financial developments and assess their implications for the economic outlook. Participants observed that since then, the economic outlook had become more uncertain. Financial market volatility had remained elevated over the intermeeting period, and, despite some easing since the December FOMC meeting, overall financial conditions had tightened since September. In addition, the global economy had continued to record slower growth, and consumer and business sentiment had deteriorated.

Hence, regardless of a rallying equity market in January, the Fed remains discouraged to return to hawkish mode, amid weakening economic conditions abroad that threaten to derail the US economy as well, which is already showing some weak spots itself. Therefore the "uncertain" outlook at present will require the Fed more time to assess economic conditions to determine whether the economy requires more rate hikes. From my perspective, the latest Fed minutes have reflected more dovishness, which bodes well for gold prices and the IAU ETF.

Fed members remain dovish

The release of Fed minutes comes amid more Fed members coming out lately to express their views on the path forward for monetary policy. One of the biggest doves on the Fed presently, James Bullard, reiterated his perception that the Fed has already raised rates too far, which is curbing economic growth and inflation. Moreover, even formerly hawkish members, such as John Williams, have turned more dovish lately. Williams noted that he feels rates are already at the lower end of the range considered 'neutral', and that he will only feel the need to raise rates if economic conditions improve to the extent that more tightening is needed.

Their comments come amid more disappointing economic data releases, as the most recent Philadelphia Fed Business Outlook Survey came in at -4.1, widely missing the consensus estimate of 14, and marking a significant drop from last month's reading of 17. This deteriorating business sentiment signals economic contraction ahead. Hence, the weakening economic outlook will certainly not allow the Fed to turn more hawkish any time soon, which is likely to support gold prices and the IAU ETF.

Bottom Line

The latest Fed minutes and statements made by Fed members reflect a more dovish approach from the central bank for the foreseeable future, which will continue to support the IAU ETF higher. Nevertheless, as equity markets continue rallying and certain economic hurdles such as the government shutdown abate, investors should watch out for any potential hawkish statements made by Fed members going forward. Though the Fed is indeed approaching the end of its rate hiking cycle, hence the predominant trend for gold prices and IAU ETF remains upwards.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in IAU over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.