Will Gold Ever Get Its Glitter Back?

Will Gold Ever Get Its Glitter Back?

Investing.com  | Feb 13, 2018 02:30AM ET

Gold started the new year on an upbeat note, finishing January with a gain of roughly 3% after reaching a 17-month peak on January 25, close to the $1,370 level, as a weaker U.S. dollar boosted its appeal.

However, the yellow metal has since been on the back foot, catching many investors who were expecting prices to continue higher by surprise, testing the $1,400-handle.

Perhaps most concerning for gold bulls, however, is the fact that the traditional safe-haven asset hasn't enjoyed strong inflows in the wake of the increased volatility and turbulence seen across U.S. and global stock markets in recent days, although its 'sister' safe haven asset, the yen, saw gains of 1.4% over the similar period. Not only has the price of gold failed to get a lift from the fickle market conditions, but the commodity—which traditionally moves higher as market risk increases—actually sank in unison with the stock market. What's driving this unusual turn?

Gold 240-Minute Chart

The recent downward trend in gold can be attributed to a pair of key factors: rising bond yields and a resurgent dollar.

The benchmark U.S. 10-year bond yield rose as high as 2.902% on February 12, the loftiest levels since January 2014, reflecting rising expectations among investors of higher inflation and a stronger economy. But rising inflation would typically be a tailwind for gold, since it is often considered a hedge against rising prices. However, uncertainty about how quickly yields will rise and the degree to which inflation will resurface may be giving gold traders pause.

Indications of stronger inflation have led investors instead to fear that the Federal Reserve may raise rates faster and more often than previously expected. Indeed, the market is now adjusting to the possibility that the Fed could raise rates four times in 2018, compared to the three it currently forecasts, especially if Congress loosens the fiscal purse-strings. Meanwhile, the Dollar Index, which tracks the greenback's strength against a basket of six major rival currencies, firmed above the 90-level, after spending most of January at around the 88-handle.

Those factors will likely take the shine off gold even more as the year progresses as the Fed and the world's other leading central banks start moving away from their easy monetary policy for this first time since the 2008 financial crisis, toward normalization and higher interest rates.

Gold is highly sensitive to rising interest rates. As these increase, the opportunity cost of holding non-yielding bullion decreases, while boosting the dollar, in which it is priced. A stronger U.S. dollar usually weighs on gold, since it dampens the metal's appeal as an alternative asset and makes dollar-priced commodities more expensive for holders of other currencies.

The notion that the inverse relationship between stocks and gold is breaking down is certainly not a good signal for the precious metal over the longer term. Ordinarily, gold would draw bids from investors fretting about a volatile equity market.

Gold:SPX 1983-2016
Source: CNBC

From a technical perspective, gold looks set to test support near the $1,300-level, which if breached, would see prices fall towards $1,250. A break below that line would see the yellow metal head to the key $1,200-mark, where it has strong support.

Gold Weekly with Support and Resistance

The chart above depicts how gold prices have been trapped in a range between $1200 to the downside and $1375 to the upside since February 2017. Until one of these levels is ultimately breached, the precious metal will remain confined to this range.

Though some analysts continue to recommend gold as a key component of a diversified portfolio, taking all the above into consideration, it's easy to see why gold has lost its luster among many investors.


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Brad Smith
Brad Smith

Generally, the more uncertainty there is in the market, the better it is for gold.  ... (Read More)

Feb 15, 2018 12:03AM GMT· Reply
Brad Smith
Brad Smith

Thanks Jesse for this thought provoking piece. The weakness in the USD has indeed served as a catalyst pushing gold higher but it seems to be going away as the USD firms up. Market volatility is the next catalyst that should be supporting the gold price but if the relationship is breaking down, this does not bode well for gold.  ... (Read More)

Feb 15, 2018 12:01AM GMT· Reply
Fin smfin
Fin smfin

Another half baked expert on gold and silver....few days ago in a piece his pal wrote about gold going to mid 1200s?, I was laughing at his charts and predictions, two or three weeks later as of today, gold kept going up as it destined to be, and now this guy, nothing matters as far as gold and silver price movement concerned, the only direction left is rally upwards, there is no turning back!...  ... (Read More)

Feb 13, 2018 05:52PM GMT· Reply

with you jesse, 100% on this no account metal trade. door stoppers at best. of course metal may have same marketing agents danica has. so amusing to read this morning the usual natural gas forum chirpers here that invest in nothing, but talk gold. ha. citing that 13% up. what a joke. that wouldn't even cover their ingress/egress fee's to buy/sell the junk. as i've told you i have more silver than all the chirpers combined in their mother's vitange hairbrushes and tea sets. what a joke. maybe this or next year i'll have a garage sale in summer and sell all the silver to tourists in jackson, wy. there is a way to play gold, but these lazy wretches won't do that. that's to earn some equipment and go dig/dredge/dive for it. it worked in lead,sd. and there still lots left in the trinity river. i get around. don't just chase cattle in wy. anyway, gold, what a bust. it's a bust in venezuela too where gold can't even buy a loaf of bread. need euro or dollars for that.  ... (Read More)

Feb 13, 2018 04:36PM GMT· Reply
Gabriel Nunes
Gabriel Nunes

I doubt that Russian and Chinese Central Banks have been buying all the physical gold they can for the last years only to see it it go down. I doubt very much. Maybe the author of this article could elaborate about this a bit.  ... (Read More)

Feb 13, 2018 02:46PM GMT· Reply

It will be time to go long on gold  in the coming months  ... (Read More)

Feb 13, 2018 11:15AM GMT· Reply
Dwain Hobbs
Dwain Hobbs

Lost its luster ? What are u on about ? Its up this year,,, up 13 % last year,,,up near 100% last decade , up 400% last 40 years ,, you must be one of these trapped shorts, good luck !  ... (Read More)

Feb 13, 2018 09:08AM GMT· 6 · Reply
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