Gold has in little more than two months gone from being a favored reflation bet to heading for its worst first quarter in almost four decades.
The change of fortune comes as higher yields dent the appeal of bullion, which offers no interest. At the same time, optimism that the rollout of COVID-19 vaccines would drive a global recovery has pushed investors to switch from the traditional haven to other assets.
Gold’s turnaround has been sharp. After enjoying its best year in a decade, the metal has slumped more than 10 percent this year.
Investor inflows into exchange-traded funds (ETFs), which supported the metal’s surge to a record above US$2,075 an ounce in August last year, have gone into reverse. While inflation expectations are rising, which some investors say should support gold, that is being overshadowed for now by the effects of rising yields.
Holdings in gold-backed ETFs have declined to the lowest since June last year and spot bullion prices down 0.1 percent at US$1,695.13 an ounce on Friday for a third weekly loss.
Gold for April delivery fell US$2.20 to US$1,698.50 an ounce, down 4.3 percent for the week.
Silver for May delivery fell US$0.17 to US$25.29 an ounce, down 8.5 percent, and copper for May delivery rose US$0.10 cents to US$4.08 a pound, down 4.4 percent.
On Friday, the metal touched the lowest in almost nine months after US Federal Reserve Chairman Jerome Powell stopped short of forcefully pushing back against a recent surge in long-term borrowing costs, sending US Treasury yields soaring.
During an appearance in a Wall Street Journal Webinar on Thursday, Powell said the bond market swings “caught my attention.”
He said he is monitoring financial conditions and would be “concerned” by disorderly markets.
“Although inflation is becoming a theme, gold is struggling,” said Robert Jan van Der Mark, a portfolio manager at Aegon NV who sold his gold holdings in late November last year. “The recent move in US yields was also mainly driven by real yields moving up, not really by break-even inflation. That’s not helping gold prices.”
For some, the vaccine breakthroughs in November proved a turning point, with Bank of America Corp dropping its previous bold forecast of US$3,000 for bullion.
Others are playing catch-up. Hedge funds have slashed their long positions to the lowest since May 2019, while banks from Goldman Sachs Group Inc to UBS Group AG are racing to lower their forecasts for the precious metal.
Investor disillusionment with bullion is partly being fueled by the arrival of a new competitor: bitcoin. Those fearing currency debasement now have an alternative asset whose supply is inherently limited, with the digital currency surging this year.
“Some investors are clearly looking at bitcoin and digital assets as a replacement for gold,” Citigroup Inc analyst Aakash Doshi wrote in a note. “There is a material enough overlap of retail and more importantly institutional dollars in these markets.”
Still, it might be premature to write off gold, with signs of a recovery in the physical markets that were particularly hard-hit during the COVID-19 pandemic last year.
Indian jewelry demand is rebounding from a more-than two-decade low, with prices falling below the psychologically important level of 50,000 rupees (US$688) per 10g, which kept buyers away last year.
In China, gold is now trading at a premium to London prices after being cheaper for most of last year, another sign of recovering demand.
“On a longer-term view, we see gold moving higher given supportive trends such as rising incomes in emerging markets boosting physical demand and global annual mined production continuing to decline,” said Evy Hambro, global head of thematic and sector based investing at BlackRock Inc.
Still, that might be some way off, as improving growth prospects mean there is little appetite for the haven asset in the immediate term.
“Higher rates and an improving economy are suppressing gold,” said Plurimi Wealth LLP chief investment officer Patrick Armstrong, who cut his funds’ exposure to the metal by half in November last year. “In our base case, gold won’t do well.”
Additional reporting by AP, with staff writer
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