From Myra P. Saefong: Gold prices have pulled back from a 10-month high in recent sessions, leaving investors wondering why the many geopolitical and economic issues plaguing the market haven’t been able to fully support the metal’s haven appeal.
Gold notched that multimonth peak just over a week ago on the back of uncertainty linked to Brexit, the U.S.-China trade dispute, and global economic growth. But prices on Thursday were in jeopardy of suffering a loss for the month on the heels of four monthly gains–the longest upward streak since 2016.
“Prices have run up to the top end of the trading range they have held for the past five years,” says Rob Haworth, senior investment strategist at U.S. Bank Wealth Management, pegging the “top end” at $1,350 to $1,400. “Without further easing in financial conditions, ramping inflation or stock market volatility, gold prices are likely to struggle at the top end of this five-year trading range,” he says.
Futures prices GCJ9, -0.45% settled at an almost two-week low of $1,321.20 an ounce on Wednesday. They traded down $4.30, or 0.3%, at $1,316.80 an ounce in Thursday dealings and were poised for a monthly loss of 0.6%. They had finished at $1,347.90 on Feb. 20, the highest for a most-active contract since April.
Gold still faces supply challenges and any uptick in demand would tighten inventories.
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The gold mining sector has seen a spate of merger and acquisition activity, most recently with Barrick Gold Corp’s ABX, +0.91% unsolicited proposal to buy Newmont Mining Corp. NEM, +0.18% in a deal that values Newmont at nearly $18 billion.
“The M&A activity is reflective of the increasing difficulty [in] finding and mining gold reserves,” says Will Rhind, chief executive officer at exchange-traded fund issuer GraniteShares. “The consolidation of the gold-mining sector…highlights existing gold supply difficulties and shortages, which is supportive of gold prices,” he says.
On the demand side, central banks have been on a gold buying spree, lifting 2018 net purchases of the metal to 651.5 metric tons–their highest in more than 50 years, as geopolitical uncertainty and economic worries prompted national banks to diversify their reserves, according to the World Gold Council.
“Central bank choices about composition of their reserves send important signals to financial markets about relative safety of currency alternatives,” says Trey Reik from Sprott, which manages the Sprott Physical Gold Trust PHYS, -0.32%“Whenever gold allocations are on the rise, central bank authority is augmenting the [money-like qualities] of gold.”
Carlos Artigas, WGC director of investment research, says that on an annual basis, central banks have been net buyers of gold since 2010. A recent WGC survey also revealed that almost one-fifth of central banks signaled their intention to raise gold purchases over the next 12 months.
“Central bank buying is quite bullish as they are massive institutional players…and even a small allocation to gold can be quite significant in terms of additional physical demand,” says Mark O’Byrne, research director at precious metal brokerage GoldCore. “Official sector gold buying does not imply necessarily that [central banks] are bullish on gold per se….It likely means that they are concerned regarding the outlook for the dollar and are reducing and hedging exposures in this regard.”
Year to date as of Thursday, the dollar, as measured by the ICE U.S. Dollar IndexDXY, +0.05% is little changed after a 4.4% rise in 2018. Dollar-denominated gold often trades inversely to the U.S. currency.
“Trillion-dollar deficits in the U.S. under [President Donald] Trump and growing fiscal imprudence will be making central banks with large dollar reserves increasingly nervous about the outlook for the dollar,” says O’Byrne. “A $22 trillion national debt and the lack of any will to rein in massive spending is making America’s creditors nervous and…the ‘risk free’ status of U.S. Treasuries will come into question.” That may lead to higher demand for haven gold.
“Given the scale of the risks,” O’Byrne believes gold is “more than likely” to climb to a record high of $2,000 within the next 24 months.
The SPDR Gold Shares (GLD) was trading at $124.11 per share on Thursday afternoon, down $0.58 (-0.47%). Year-to-date, GLD has gained 0.37%, versus a 4.91% rise in the benchmark S&P 500 index during the same period.
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