Gold at a New Low for the Year, but ETF Investors Still Love It

May 15 2018

Gold prices slumped, falling below the $1,300 level for the first time since December as a rising dollar and higher Treasury yields led traders to dump the precious metal.But while the bullion price in the futures market on Tuesday reached a new low for the year, exchange-traded-fund investors recently have been bullish on gold. Investors poured about $3.1 billion into gold-backed ETFs during April, the highest total since February 2017, data from the World Gold Council, an industry trade group, showed.

The contrasting views highlight the two opposing forces that have kept gold prices mostly locked in a narrow range between $1,300 and $1,350 a troy ounce, avoiding the big price swings that have rocked other assets such as stocks and oil.ETF buyers and other bulls have turned to gold as a traditional haven play during turbulent political times, with the prospect of a trade war still looming, uncertainty swirling around North Korea and tensions in Syria and Iran flaring up. Some money managers are also using gold to hedge against a pickup in inflation signaled by recent consumer-price data.But speculative interest in gold has softened as expectations of higher U.S. interest rates have pushed up bond yields and the dollar, said Maxwell Gold, director of investment strategy at ETF Securities. “There’s a bifurcation in the types of investors for gold,” he said.

Front-month gold futures tumbled 2.1% Tuesday to $1,288.90 a troy ounce on the Comex division of the New York Mercantile Exchange—their worst day since December 2016. The drop came after data showing U.S. retail sales rose broadly in April pushed up Treasury yields and the dollar, continuing their recent trend.Any time recently that gold has marched toward the upper end of its trading range, a strengthening dollar and worries about higher interest rates have zapped its momentum. A rising U.S. currency makes gold more expensive for overseas buyers, while higher Treasury yields tend to make the precious metal less attractive by comparison.

With global growth momentum shifting back to the U.S., the WSJ Dollar Index hit its highest level of the year Tuesday and in April had its best month since November 2016. And the yield on the benchmark 10-year U.S. Treasury yield in late April pierced 3% for the first time in more than four years, with more investors anticipating that the Federal Reserve will raise interest rates three more times this year, compared with the previous projection of two. On Tuesday, the yield closed at its highest level since July 2011.Hedge funds and other speculative investors have cut wagers on higher gold prices to their lowest level since July. Net bets on higher gold prices by hedge funds and other speculative investors fell by more than 50% during the week ended May 1, according to the Commodity Futures Trading Commission. The net bullish bets stayed near that level the following week.

An analysis by the World Gold Council earlier this month showed that demand for gold during the first quarter was the weakest to start a year in a decade. Sales of gold bars and coins have also been tepid, a sign to some that retail buyers have cooled on the yellow metal. Monthly sales of American Eagles, a popular gold coin that is a proxy for retail sales of physical gold, in recent months have hit their lowest level since 2015, U.S. Mint data show.“There are major economic, financial and political issues on the horizon that suggest stronger investment demand and higher prices at some point—but they’re not here now,” said Jeffrey Christian, managing partner at commodities research and asset-management firm CPM Group .With another U.S. interest-rate increase widely anticipated in June, some analysts expect gold prices to fall leading up to the Fed’s monetary-policy meeting before recovering, a pattern that has held over the past few years.

Others are projecting that April’s money flows into gold ETFs will continue as demand for bullion in emerging markets such as China recover from a weak start in 2018. Gold bulls are hoping that prices can log a third straight year of gains and bring investment interest back into the market, with prices still 32% below their 2011 records.“I was a little concerned when I saw first-quarter demand numbers, but they are starting to look like an outlier,” said George Milling-Stanley, head of gold strategy at State Street Global Advisors. “We’re starting to see figures that suggest demand is a lot better.”

Source: https://www.wsj.com/a