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Amid Trade Tensions, Gold Loses Its Shine as a Haven

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07/06/2018 | 02:57pm CEST

By Ben St. Clair

As some investors look for safety, one haven is being ignored -- gold.

The precious metal has historically been used as a safe place to invest in times of economic and political stress. But even as investors fret about the prospect of trade war, gold has fallen by nearly 4% this year. In the past month, over $2.1 billion has flowed out of the five largest exchange-traded funds that track the precious metal, according to FactSet data.

That confirms what some analysts have been saying for a while. Gold isn't the haven it once was. In recent years, its price has been mainly influenced by U.S. interest rates and the dollar.

As both rise, gold becomes less attractive. Meanwhile, physical demand from China and India that can buoy gold prices has faded.

On Friday, the U.S. and China imposed tariffs on $34 billion worth of each other's imports. Analysts have warned that a trade war could knock the global economy. Political uncertainty also remains in European countries, such as Germany, Italy and the U.K.

"You would have thought that trade tensions would be a positive for gold, and we would have seen more safe-haven buying," said Caroline Bain, chief commodities economist at Capital Economics. "To be honest it's been quite a surprise."

Gold was trading down 0.3% at $1,255.55 a troy ounce in London trade on Friday, near six month lows.

It wasn't always this way in times of stress. In 1980, prices jumped more than 60% after the Soviet Union invaded Afghanistan and as Iran's Islamic revolution played out. From October 2008 to September 2011 gold prices shot up 150% amid a global recession and concern central bank actions would increase inflation.

But rising U.S. interest rates and subsequent dollar appreciation have made gold less attractive. Since gold is priced in dollars, the metal is more expensive to other currency holders as the greenback rises. The WSJ Dollar Index, which measures the currency against a basket of 16 others, has risen over 4% in the last three months. Higher U.S. rates makes gold less competitive against assets that offer a yield, such as Treasurys.

"The dollar has just been phenomenal in the past month or so, and I think what it really reflects is everything that gold hasn't achieved this year," said Oliver Nugent, a commodities strategist at ING.

To be sure, current uncertainty -- which has increased volatility in stocks -- hasn't provided a blanket boost for all traditional havens. But investors say it has been a factor in the continued strength of government bonds and the dollar.

Gold's own role as a haven has been waning for some time. Analysts note that Russia's annexation of Crimea and turmoil in Syria failed to really move gold prices, while concerns over North Korea's nuclear arsenal and uncertainty about Britain's Brexit vote offered only a temporary boost.

Two academics who studied gold's role as a haven found that investors who hold the metal more than 15 trading days after an extreme negative shock lose money from that investment.

"In the longer run, gold isn't a haven," said Dirk Baur of Dublin City University and Brian Lucey of Trinity College Dublin, in the 2010 research paper.

The recent price drop has also yet to trigger a buying rush in India and China, two of the largest consumers.

Stronger Indian and Chinese demand could typically be expected to stem gold's slide. Gold bullion sellers and jewelers seemed unsure why, but some predicted further price falls could bring bargain hunters in.

"I've given up trying to predict the gold price," said Ben Davis, a mining equity analyst at Liberum Capital Limited.

Write to Ben St. Clair at ben.stclair@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
GOLD 0.24% 1202.316 Delayed Quote.-8.00%
US DOLLAR INDEX 0.15% 94.64 End-of-day quote.3.03%
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