By Joe Wallace
The gold market has lost its glint, dashing the hopes of people who predicted that lavish stimulus spending by central banks and governments would send bullion prices to new heights this year.
Gold futures on Wednesday closed their worst quarter since 2016, falling 9.5% to $1,713.80 a troy ounce. Few assets have fared worse: namely, the price of orange-juice futures, cocoa, Turkey's lira and long-term U.S. government bonds.
The precious metal has suffered a reversal in fortunes since August, when prices closed at a record $2,069.40 a troy ounce. Gold has since dropped 17%. Forecasts of a rapid global economic expansion this year, powered by vaccinations and U.S. stimulus, have tarnished gold's allure as a haven in uncertain times.
"As people have got more optimistic about the world economy, interest rates have risen and the relative perception of gold to other yielding assets has become less attractive," said Nabeel Abdoula, deputy chief investment officer at Fulcrum Asset Management.
The London-based hedge fund has cut its gold investments in the last year. It still has holdings in the precious metal using futures and options, said Mr. Abdoula.
Gold's 75% surge starting in August 2018 had prompted bulls to say low interest rates and swelling deficits would debase the dollar, fueling inflation and pushing the metal higher still. Concerns about inflation have long failed to materialize: Forces including an aging population and globalization have helped to keep U.S. inflation low and stable for about three decades.
Instead, robust U.S. growth has unexpectedly strengthened the dollar: the WSJ Dollar Index rose 3.1% in the first quarter. A stronger greenback makes many commodities more expensive for buyers using other currencies.
The argument for holding gold as a hedge against inflation has also endured a setback this year. The prospect of buoyant economic activity and higher inflation fueled a steep rise in yields on U.S. government bonds in the first quarter. Real yields, or the returns on government bonds after adjusting for inflation expectations, also jumped, raising the opportunity cost of owning gold, which doesn't offer an income.
Fulcrum's Mr. Abdoula sees three paths for gold from here.
In the first scenario, bond investors who are betting the Federal Reserve will raise interest rates sooner than it says to curb inflation may be proven right. That could send gold prices spiraling lower.
In the second, Fed officials are correct in projecting that a spurt of inflation this year will be short lived and that the central bank will keep rates near zero through 2023. In that scenario, Mr. Abdoula reckons gold prices have fallen too far.
The third possibility is that disruptions to the global supply chain for vital products such as electronic chips and plastics, or other factors, generate higher and longer-lasting inflation than investors or the Fed currently predict. That might depress real bond yields and boost gold, Mr. Abdoula said.
Gold's decline has knocked down shares of miners including Barrick Gold Corp. It has also weighed on exchange-traded funds backed by gold, which are a cheap and easy way for individual and institutional investors alike to bet on prices. Investors have pulled a net $7.52 billion this year from the SPDR Gold Trust, the biggest such fund, according to FactSet.
In the early months of the pandemic, the metal was a prime beneficiary of a collapse in interest rates. Analysts at banks including Goldman Sachs and Citigroup touted gold as an investment. Money poured into gold-backed ETFs. Warren Buffett's Berkshire Hathaway Inc. added to the excitement when it invested in Barrick.
That zeal has cooled. Several banks have slashed their forecasts for gold prices. Goldman Sachs in February cut its 12-month outlook to $2,000 a troy ounce, from $2,300 in August.
"What we got wrong is the underlying economic growth environment is far stronger," said Jeffrey Currie, head of commodities research at the bank. Investors have switched out of gold and into markets that stand to prosper from the lifting of lockdowns, such as industrial metals, he said.
Another factor reducing the attraction of gold is that the metal has failed to act as a hedge that zigs when riskier assets like stocks zag. In recent months, the correlation between the metal and the S&P 500 has been consistently positive.
Some investors remain bullish on gold and see now as a time to buy. Daniel Egger, chief investment officer at Switzerland's St. Gotthard Fund Management, said central banks will push back against rising bond yields, giving gold a new lease of life.
A sustained rise in inflation-adjusted yields "would suffocate the real economy considering the enormous amounts of debt that have come to the market," Mr. Egger said.
Write to Joe Wallace at Joe.Wallace@wsj.com
(END) Dow Jones Newswires
04-01-21 0546ET
