Gold's hot streak goes cold as investors seek riskier assets

Gold's hot streak goes cold as investors seek riskier assets

Gold

Months after a strong start to 2019 that hinted at a possible gold renaissance, the precious metal is on track to erase its gains for the year as increasingly confident investors abandon the market.

“Prices of the metal have fallen more than 4% since hitting a 10-month high in February and are close to where they started the year,” reported The Wall Street Journal.

The early 2019 gold rush came in the wake of stock-market volatility in the fourth quarter of 2018, along with developing fears of a far-reaching economic slowdown. Since then, analysts say, sentiment has been shifted by rising hopes for an agreement to end the months-long tariff dispute between the US and China, as well as signals that the US Federal Reserve will leave interest rates untouched this year. That’s apart from expectations that stimulus measures by central banks around the world will spur economic activity.

That increased confidence has propelled a rally in stocks as well as other materials like oil and copper in recent weeks, effectively crowding out demand for gold.

“There are a lot of competing assets for the capital that’s in the market right now,” Peter Hug, director of metal sales at Kitco Metals, told the Journal. “[In the gold market], people are just getting bored. It’s almost like watching paint dry.”

The drop in gold prices adds to the frustrations of investors who for years have held out hope that the metal could sustain a rally above US$1,350 a troy ounce. Gold has threatened that level numerous times in past years, but has always sunk back below the critical mark.

Prices of the metal reportedly peaked at $1,347.90 in February and closed at US$1,291.30 on Monday; both figures are over 30% below the record set in 2011. Another sign of investors growing cold toward gold is the reported US$1-billion outflow from gold-backed ETFs in February, which snapped a four-month streak of inflows according to the World Gold Council. Fund flows in March were reportedly flat in March as gold prices fluctuated.

Based on data from the Commodity Futures Trading Commission, bullish wagers on the metal still topped bearish ones among hedge funds and other speculative investors as of April 9. However, such investors have nearly halved their bets on increasing gold prices since mid-February.

Escalating confidence in US growth could also impact gold prices by lifting the greenback and US Treasury yields. “The WSJ Dollar Index, which tracks the dollar against a basket of 16 other currencies, has climbed more than 1.5% from its early-year low hit in late January,” the Journal said. “And the yield on the benchmark 10-year U.S. Treasury note has rebounded above 2.55% since tumbling below 2.4% late in March, its lowest level in 15 months.”

Increased US dollar strength would make US-currency denominated commodities like gold more expensive for buyers outside the country, while rising Treasury yields would make the metal relatively less attractive for those seeking yield.

Some analysts caution that trade-talk setbacks or disappointments in earnings data in the coming weeks could spark market volatility once more and renew demand for gold. But the prospects for that appear weak based on the Citigroup Economic Surprise Index for the US, which last week fell to its lowest level since June 2017.

“There’s just nothing urgent right now to push people into gold,” Hug said.

 

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