Why gold is losing its lustre
Rising rates, the US dollar and even bitcoin have taken the shine off.
The global financial crisis (GFC) is easy to spot on graphs. Often it’s a great crater on a steadily climbing slope. For gold prices, however, it’s a sheer mountain face that peaks in 2011.
Gold prices soared in the aftermath of the GFC to a record high of US$1900 per troy ounce as the United States Federal Reserve loosened monetary policy to kickstart the US economy’s stuttering recovery, sending interest rates as low as 0.25 per cent.
But central banks are finally taking Western economies off life support. The dollar, another key driver of gold’s price, is also showing signs of recovery, while the new kid on the block, bitcoin, has stoked concerns that demand for the precious metal as a safe haven could begin to dwindle.
Gold prices have fallen by up to 8 per cent in just three months, bottoming out in early December below US$1250 per ounce, as the Fed prepared the markets for the third rate hike of 2017.
The Fed’s monetary policy continues to be the main catalyst for gold prices, and they will likely drift lower in 2018 as the central bank is in the middle of a policy tightening cycle, SP Angel analyst Sergey Raevskiy says.
Gold is sensitive to movements at the Fed for three main reasons. First, interest rate hikes boost the dollar and so push down gold’s relative value. Second, most investors in physical gold need to pay for secure storage.
‘‘The higher the interest rate goes in the [United] States, the more it costs to hold gold,’’ says David Govett, Marex Spectron’s manager of precious metals, who estimates that the cost has doubled from about US4 cents a day per ounce to US8c or US9c, in a year.
Finally, other investments start to become more attractive propositions for investors when rates begin to climb.
Prices have also seen little support from physical demand, Raevskiy argues, with weak uptake in India and China, the world’s two largest gold markets.
Climbing production costs have created a floor that should stop prices plunging to pre-GFC levels.
Govett says: ‘‘Before the crisis, the annual production level for gold was around US$500 an ounce but nowadays you’re talking about around US$1000 an ounce.’’
However, the catalysts to send gold soaring are few and far between. Although markets took fright at rising tensions between US President Donald Trump and North Korean leader Kim Jong-un, each bout of chest-beating has elicited a weaker reaction from investors looking for a safe haven.
‘‘Now if North Korea has fired its latest weapon or it says this is tantamount to a declaration of war, gold doesn’t move a single dollar,’’ says Govett.
Some analysts have partly pinned the recent dip in gold’s price on falling demand caused by the emergence of cryptocurrencies such as bitcoin. However, bitcoin’s astronomical price rise this year has weakened its credentials as a store of wealth in turbulent times.
Gold analysts also note that the yellow metal is a vastly larger and more liquid market: Bitcoin has capitalisation of about US$230 billion (NZ$325 billion), while the value of all the gold ever mined is nearer US$8 trillion.
Govett can see a limited crossover appeal but believes any impact will be small. ‘‘It wouldn’t surprise me at all if people are pulling a bit of money out of gold and putting a bit into bitcoin.’’
Goldman Sachs has insisted that there is no evidence that bitcoin’s incredible rise this year has prompted an exit from gold.
However, analysts at JPMorgan told clients this month that the launch of bitcoin futures contracts on major exchanges has the potential to add legitimacy to it as an emerging asset class.
Analyst Lukman Otunuga argues that gold and bitcoin cater for investors with very different mindsets but its ‘‘decentralised nature, fixed supply, and transportability could have some appeal for gold investors’’.