International prices for gold, once among this year’s best-performing commodities, has tumbled to nearly two-month lows, hurt largely by waning investor anxiety and expectations for a steady pace of interest-rates hikes, according to reports.
This is so because the destabilizing events that gold bugs were betting on earlier this year haven’t yet materialized, thereby dousing investors’ anxiety over geopolitical turmoil.
Traditionally, gold, acts as a haven for investors during times of turmoil, which explains why prices of the precious metal climbed for seven of the nine weeks through early September, hitting their highest in more than a year after North Korea fired a ballistic missile over Japan.
Market analysts say investors tend to favor gold during turbulent times, betting that the metal would always hold its value more effectively than other assets.
“The geopolitical risks are impactful, but they haven’t yet impacted the real economic environment,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management.
Apart from waning war fears, a key development for the gold market has been signs from the U.S Federal Reserve that it will maintain its pace of interest-rate increases.
Specifically, the Trump administration reached a deal last month to keep the government funded and its borrowing limit suspended until mid-December. Last week, the administration released a tax plan that’s long been craved by financial markets, which all but doused anxieties.
The U.S. central bank reiterated plans to raise rates four times by the end of 2018. Some investors had doubted a third hike this year amid sluggish inflation data, which had been supportive for gold prices since the metal struggles to compete with yield-bearing assets like treasury’s when borrowing costs rise.
Markets are now pricing in a nearly 80 percent chance that rates rise again this year, up from less than 50 percent a month ago, according to CME Group data.
Adding to gold’s troubles, the Fed’s commitment to gradually raise rates has also boosted the dollar, making gold more expensive for foreign buyers as it’s a dollar-denominated commodity.
The Wall Street Journal (WSJ) Dollar Index, which tracks the U.S. currency against 16 others, is on track for its fourth straight week of gains since hitting multi-year lows early September.
Bullish bettors are getting harder to find. Hedge funds and other speculative investors have slashed bullish positions.
Net bets on higher gold prices have fallen in consecutive weeks after previously rising for nine straight weeks to their highest level of the year, data from the Commodity Futures Trading Commission show.
“The market became overbought,” Bill O’Neill, co-founder of LOGIC Advisors is reported to have said on the matter. Mr. O’Neill said he advised clients to get out of gold positions two weeks ago for the short term.
Still, some investors and analysts think prices could bounce back. They say tensions between the U.S. and North Korea remain a risk factor for global markets.
Others point to inflation, which remains well below the Fed’s 2% target, meaning that central bankers could hesitate before sticking to a path of additional rate hikes, buoying gold once again.
Gold is still up 11 percent in 2017, compared with 13% for the S&P 500. The precious metal hasn’t outperformed the benchmark equity index since 2011.
“I’m still buying weakness in this gold market with a higher forecast in mind for year end,” said Peter Hug, director of metal sales at Kitco Metals.