The price of gold dropped below $1,900 an ounce last week, ending the week down 5 percent from the previous Friday as it got hit by a strengthening dollar and falling inflation expectations.
Unprecedented global stimulus, negative real rates and a weakening dollar pushed gold to a record high above $2,075 an ounce in early August. Some banks, including Goldman Sachs Group Inc. and Bank of America Corp., forecast even higher prices.
Gold prices are being influenced by contradictory factors, some traditionally good for bullion and others not, FX Empire reported.
Some gold analysts still see bullishness in the market.
“The environment for gold … remains bullish,” said Carsten Fritsch, a precious metals analyst at Commerzbank, according to Kitco News. “Nothing has changed in the last few months.”
Others point to the rising U.S. dollar as a cause for being bearish.
Colin Cieszynski, chief market strategist at SIA Wealth Management, said that he is bearish on gold short-term.
“This is less about gold and more about the U.S. dollar,” Cieszynski said. “The U.S. dollar has dominated all markets and gold is no exception. I think we need to see another shakeout in gold before investors come back to the market.”
Rising covid-19 cases and a worsening outlook for the U.S. economy led investors to dial back how much inflation they expect in the months ahead as well as prompting investors to buy dollars, both of which weigh on gold, the Wall Street Journal reported.
Investing in gold is typically considered a way to hedge against inflation. Gold hit all-time highs in late July and early August, partly because investors bet the Federal Reserve’s stimulus would drive up the cost of goods and services.
When inflation is expected to be high, government bonds are less attractive to investors because inflation eats away at the bond’s return over time.
With expected inflation falling, real bond yields—the return on the bond when accounting for inflation—have risen slightly from their lows, making them more attractive as safe-haven investments and diminishing the appeal of gold.
Very low interest rates and central bank stimulus should keep real rates low and prevent gold prices from getting worse, Fritsch said.
Ole Hansen, head of commodity strategy at Saxo Bank said that he is also paying close attention to the U.S. dollar.
“It looks like we have more gas left in the dollar tank so the weakness in gold is potentially not yet over,” he said.
Growing uncertainty ahead of the U.S. elections could create a safe-haven bid for gold, according to Ole Hansen, head of commodity strategy at Saxo Bank.
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Market turmoil and fear of a second coronavirus wave are forcing safety-seeking investors out of gold and equities, according to Peter Hug, global head of trading at Kitco Metals.
The key driver of gold right now is the dollar, according to Bloomberg. The U.S. currency has strengthened as hope fades for more U.S. stimulus. “That’s depressed gold, even as covid-19 infections spike across Europe and fatalities exceed 200,000 in the U.S.,”
“The firm U.S. dollar is like a millstone around the neck of precious metals prices, and is putting pressure on gold despite increased risk aversion,” Fritsch said. However, Fed policy will remain expansionary for years, so “the strength of the dollar is hardly likely to last,” he added.
