Gold Hits Five-Year Low as Traders Brace for Higher Rates
Upbeat economic reports seen keeping Federal Reserve on path to higher interest rates
Gold prices tumbled to a five-year low as strong economic data boosted expectations for higher interest rates in the U.S.
As the Federal Reserve appears to move closer to raising borrowing costs for the first time in nearly a decade, investors worry that higher rates would weigh on demand for gold. The precious metal doesn’t pay interest or dividends and would struggle to compete with yield-bearing assets like Treasury bonds when rates climb.
The most actively traded gold contract, for August delivery, fell $12, or 1.1%, to $1,131.90 a troy ounce Friday on the Comex division of the New York Mercantile Exchange. This was the lowest close since April 1, 2010.
It’s the latest beating for a metal that had been one of the most popular trades for years. The 2008 financial crisis had investors seeking a safe place to stash their wealth, and many chose gold on the belief that it would keep its value better than stocks and bonds during the global economic turmoil.
Now that the U.S. economy is picking up and stocks are hitting new highs, gold has lost its appeal.
“It’s an asset that does better when everything goes to hell and doesn’t do so great when the U.S. economy is perking up,” said Bart Melek, senior commodities strategist with TD Securities in Toronto.
Gold’s downdraft, as well as its ascent to a record $1,888.70 an ounce in 2011, was driven largely by shifts in global central bank policies. The Fed and other major central banks took extraordinary stimulus measures in an effort to buoy their economies amid the fallout of the financial crisis. Many investors feared these steps would spark high inflation or erode the purchasing power of currency, and they bought gold.
But those risks failed to materialize and the global economic landscape improved, leading many investors to shed their gold holdings. As U.S. business activity gathers momentum and the labor market continues heal, Fed officials are nearing their first interest rate increase in nearly a decade.
On Friday, data showing higher inflation and a jump in housing starts dovetailed with these expectations, weighing on gold prices.
“The market is getting increasingly convinced that the Fed does raise rates this year, and this is reflected in gold prices,” Mr. Melek said.
Gold prices have now erased all the gains gathered on the back of the Fed’s bond-buying program commonly known as QE2, as well as any lift the $54.2 billion futures market gained from anticipation of subsequent easing measures employed by the central bank. The U.S. central bank closed the book on such programs in October 2014.
Many investors have sold gold in favor of the dollar or stocks, assets which are likely to benefit as the recovery gathers steam. Gold held by exchange-traded funds backed by the actual metal sank to 50.99 million troy ounces, a one-month low, and is near the lowest level since March 2009, according to TD Securities.
On July 7, hedge funds and other money managers were their least bullish on gold futures and options since 2006, the oldest data available from the Commodity Futures Trading Commission, with bets on higher prices outnumbering bets on lower prices by just 7,574 contracts.
