Gold price glitters even amid risk-on mood
Tokyo-Japan (Aug 19) Gold remains solid even after investors have regained an appetite for stocks, as negative-yielding bonds make the precious metal look like a better value.
Gold futures traded around $1,350 a troy ounce in New York on Thursday, roughly 25% above their level at the start of the year.
The price had climbed to a 2016 high in the $1,370 range last month amid market turmoil surrounding the U.K.'s vote to leave the European Union. But gold grew top heavy after risk aversion waned and investors returned to the stock market. Yet the precious metal has since rebounded to flirt with the level seen right after the Brexit vote.
Gold and stock prices typically move in opposite directions when markets grow jittery. But "that's not the case these days," Takashi Kamiya of T&D Asset Management said. Theoretically, gold should be trading around $1,070 a troy ounce based on the metal's inverse correlation with the Dow Jones Industrial Average since 2013.
The current overvalued price is attributed to low interest rates and excess liquidity resulting from prolonged monetary easing worldwide. Bond king Bill Gross surprised markets in early August when he said he was favoring gold and real estate over stocks and debt products. Sinking yields have made U.S. Treasury securities not worth the price decline risk, he said.
The pace of U.S. interest rate hikes has slowed, and rates are already in negative territory in Europe and Japan while the U.K. also has cut its key rate. A staggering 40% of industrialized countries' debt -- worth $10 trillion -- now produces negative yields, the World Gold Council said in a report this month. Gold, which does not bear interest, clearly has become an attractive alternative.
"With lingering doubts about the stock rally's sustainability, investors are holding onto gold as a hedge against riskier assets," said Koichiro Kamei, a financial and precious metals analyst. Unlike their stock counterparts, gold-backed exchange-traded funds have not suffered prominent mass departures. Leading fund SPDR Gold Shares' gold holdings now hover in the 950- to 980-ton range, up 50% from the start of the year.
The April-June ownership list for SPDR Gold Shares, released this week, shows Mizuho Financial Group and Sumitomo Mitsui Trust Holdings among those that increased their positions in the fund. Medium- to long-haul investors are pouring money into gold, leading to investor diversity for the precious metal.
The main concern for the gold market is whether the U.S. will raise interest rates, with all eyes on how Federal Reserve Chair Janet Yellen discusses the timing of a hike when she gives a speech Aug. 26. If the market starts to fully factor in a rate hike, gold might fall to around $1,300, said Tsutomu Kosuge, a representative of commodity market research company Marketedge.