Why gold’s tumble signals confidence in U.S. economy
There are some gold bulls wondering if precious metal’s years-long rebound is ending
Gold slumped nearly 3 per cent in the past week, hitting its lowest levels of the year — the latest sign that investors are betting on continued U.S. growth and shrugging off trade tensions between the world’s two largest economies.
Gold’s prolonged retreat comes after months of rangebound trading that followed three straight quarterly gains.
The recent slump is causing some bullish invest-ors to wonder whether the haven metal’s years-long rebound might be coming to an end. While gold stayed above $1,300 a troy ounce for much of the year, investors are watching to see if further volatility pushes prices below Thursday’s close of $1,267.20.
With prices still well below 2011 records, some had anticipated that investor fears would push gold higher as investors flocked to safer assets.
Instead, the metal has languished as economic-growth momentum has shifted to the U.S. and the Federal Reserve has continued to raise interest rates.
The metal’s weakness has coincided with the dollar reaching a near one-year high and the yield on the twoyear Treasury piercing 2.5 per cent for the first time since 2008.
The developments are causing some analysts to predict bullion will extend its decline, with few signs that a recession will derail the nine-year old bull market in stocks and push investors back to the precious metal.
“Gold doesn’t seem to be the vogue play right now,” said Nathan Thooft, senior managing director of global as- set allocation at Manulife Asset Management.
“People would rather own short-term Treasurys or make a dollar bet than make a gold bet.”
In addition to making gold less attractive to some, a stronger dollar makes gold more expensive for overseas buyers.
That is another reason the metal had its worst five-day stretch in almost a year through Thursday even as President Donald Trump escalated a trade conflict with China, asking his administration to identify a new list of $200 billion in Chinese goods that would be penalized with tariffs.
Despite occasional fears over trade, global investors have been assured by growth in the U.S. that is on track to exceed a 4-per-cent pace in the three months ending in June, which would be the fastest of any quarter in almost four years.
That has given the Fed a free hand to raise interest rates twice already this year and target two more increases for 2018, a more aggressive pace than the central bank had previously projected.
Growth has slowed in other parts of the world, but the World Bank estimates the global economy will still grow 3.1 per cent for the second straight year, letting other major central banks also tighten monetary policy.
“As long as the market feels that the world economy is going to be able to sustain higher rates, the price of gold is going to be trading in a range,” said Chris Mancini, an analyst at Gabelli Gold Fund. “It’s very frustrating.” Shares of gold miners have also lost their lustre. The NYSE Arca Gold Miners Index has fallen in four of the five sessions through Thursday, bringing its year-to-date losses to 6.4 per cent.
Speculative investors are turning cautious. Hedge funds and other speculative investors have lowered net bets on higher prices by more than 40 per cent in 2018, pushing them in late May to their lowest levels since last summer, Commodity Futures Trading Commission data show. Flows i nto gold-backed exchange funds have remained tepid and demand for American Eagle gold coins, a proxy for physical demand, recently hit a multi-year low.
Some say that rising inflation could lead some investors to turn to gold as a hedge.
But adding to worries for bulls, gold has been moving more in lockstep with other materials such as oil and copper, stoking fears that if investors sell commodities, the yellow metal will also suffer.
U.S. crude futures are more than 6 per cent below their May multi-year highs, and copper dropped in seven of the last nine sessions entering Friday.
“What broke the back for gold was really the commodity selloff,” according to Vinay Pande, head of short-term investment opportunities at UBS Global Wealth Management.