Gold falls out of favour as risk rally continues into spring
Prices verge on erasing year’s gains as investors hopeful for growth seek riskier assets
Gold is threatening to erase all of its gains for 2019, the latest signal that rising confidence in the world economy is pushing investors away from assets typically considered safe.
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. The drop is a sign of market optimism because investors tend to favor the safehaven metal during times of heightened geopolitical uncertainty.
Volatility in the fourth quarter of 2018 drove investors toward gold, and fears of a far-reaching economic slowdown lifted prices to start the year.
But faith that the U.S. and China will reach an agreement to end their monthslong tariff fight and the Federal Reserve’s signals that it will likely leave interest rates unchanged this year have shifted sentiment, analysts say. Those developments have driven a rally in stocks and other materials such as oil and copper, limiting demand for gold in recent weeks.
“There are a lot of competing assets for the capital that’s in the market right now,” said Peter Hug, director of metal sales at Kitco Metals.
In the gold market, “people are just getting bored,” he added. “It’s almost like watching paint dry.”
The drop in gold prices is the latest setback for those investors who have been waiting years for the metal to sustain a rally above $1,350 a troy ounce. Gold has threatened that level several times in recent years, only to retreat back beneath it.
Prices peaked at $1,347.90 in February and closed Monday at $1,291.30. They are more than 30% below their August 2011record.
In other signs that investors are growing cautious on the metal, more than $1 billion flowed out of gold-backed exchange-traded funds in February, after four consecutive months of inflows, according to data from the World Gold Council. Fund flows were essentially flat in March as gold prices wobbled.
And hedge funds and other speculative investors have nearly halved net bets on higher gold prices since mid-February, though bullish wagers still topped bearish ones in the latest figures through April 9, Commodity Futures Trading Commission data show. Bearish bets exceeded bullish ones for much of last summer before gold rebounded during the fourth quarter.
Mounting confidence in U.S. growth can also hurt gold by lifting the dollar and 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. 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.
Bond yields rise as prices fall and tend to climb when investors are more hopeful about the economic outlook and selling ultrasafe Treasurys. A stronger dollar makes gold and other commodities denominated in the U.S. currency more expensive for overseas buyers, while rising Treasury yields make the metal less attractive to yieldseeking investors. Steady hiring data from March has also lifted confidence in U.S. growth, investors say. Employers added more jobs than expected last month after hiring slowed in February, while the unemployment rate held near its lowest level in almost five decades.
Many investors are holding out hope that a U.S.-China trade pact and stimulus measures by central banks around the world will spur economic activity. Treasury Secretary Steven Mnuchin said over the weekend the U.S. and China are continuing to make progress on trade talks and “getting close to the final round of concluding issues.”
Still, some analysts caution that setbacks in trade talks or disappointing earnings data in the coming weeks could stoke market volatility and make gold more attractive. As trade talks continue, many economic data points also remain tepid.
The Citigroup Economic Surprise Index for the U.S., a measure of whether economic reports are meeting projections, fell to its lowest level since June 2017 last week.
“There’s just nothing urgent right now to push people into gold,” Mr. Hug said. “That could change extremely quickly if the equity market takes it on the chin or something negative comes out of trade talks.”