Bets on Falling Interest Rates Unleash Gold Rally

June 9, 2019

New York (June 9)  Gold is on its longest winning streak in almost a year and a half, the latest signal that investors are preparing for the Federal Reserve to lower interest rates amid signs of a slowdown in economic growth.

The safe-haven metal rose for eight consecutive trading sessions through Friday, its longest run since January 2018. Prices tend to increase when investors are growing anxious about the U.S. economy and seeking more stable alternatives to stocks, oil and other risky assets.

The possibility of lower rates has also hurt the dollar, making gold, which is priced in the U.S. currency, cheaper for foreign buyers. In the coming days, investors will monitor data on inflation, industrial production and retail sales for May for further clues about the trajectory of U.S. economic growth.

Gold's rally marks a departure from the first five months of the year, when investors generally preferred the safety of the dollar and U.S. Treasurys, confident that the U.S. economy could withstand heightened trade tensions better than China and the eurozone.

But now, following a stretch of downbeat economic data points, many expect a slowdown overseas to put the brakes on domestic growth, forcing the Fed to cut rates and lifting the allure of gold.

"There are concerns that there's a possibility that the U.S. economy might slow down or even go into recession," said Joseph Foster, who runs a fund that invests in shares of gold miners at VanEck. "It's not just gold: If you look at interest rates, they've collapsed. We've had a string of weak manufacturing numbers."

As investors ramped up bets on falling rates in the past week, gold futures rose to $1,341.20 a troy ounce, within 0.2% of a nearly 14-month high. Prices are up 5.1% since May 28. Other perceived havens, including the Japanese yen and the Swiss franc, have also jumped.

The latest leg in gold's rally came on Friday after the Labor Department released disappointing hiring figures for May. Earlier in the week, IHS Markit said U.S. manufacturing activity grew at its slowest rate since September 2009 last month, while a gauge of factory activity by the Institute for Supply Management dropped to its lowest point in 2 1/2 years.

Following the release of Friday's labor-market figures, traders in federal-funds futures priced in a roughly 87% chance of two or more interest-rate cuts this year, CME Group data show. They had already raised bets on lower rates after comments from Fed Chairman Jerome Powell and other central-bank officials indicating they are monitoring signs that trade uncertainty is hurting the economy.

Signals that other major central banks will keep interest rates at low levels or even cut them have also boosted gold, which carries no yield and can become more attractive to yield-seeking investors when rates decline. Last week, the European Central Bank pushed back guidance of when it will raise rates from record lows, and the Indian and Australian central banks lowered their own key lending rates.

"If you take a weighted bond-and-stock portfolio, it's done pretty well this year -- there's been no need to have gold," said Bart Melek, head of commodity strategy at TD Securities. "But if you introduce slower growth and the Trump-trade story, it's not a bad time to add gold to a portfolio."

Net bets by hedge funds and other speculative investors on higher gold prices surged to their highest level since April 2018 during the week ended Tuesday, Commodity Futures Trading Commission data show. Net bullish bets more than tripled from the previous week.

Some analysts are waiting to see if gold can break through its February peaks and sustain a rally if the dollar stabilizes or investors dial back bets on rate cuts. Many still remain more confident in the U.S. economy than growth overseas, particularly in China, potentially limiting bullion's future gains.

Still, several analysts predict prices will rise further. Natasha Kaneva of JPMorgan Chase sees prices rallying to $1,405 an ounce in the fourth quarter and $1,480 by the end of 2020. Georgette Boele, coordinator of currency and precious-metals strategy at Dutch bank ABN Amro, thinks they could hit $1,500 next year.

The rally in prices has been a boon for beaten-down shares of gold miners, which some analysts use as a leading indicator for the metal. Barrick Gold Corp. has added 7.6% in the past month, while Newmont Goldcorp Corp. is up 16%.

In another sign of increasing investor interest, nearly $700 million flowed into State Street Global Advisors' SPDR Gold Trust exchange-traded fund last Monday, the largest daily inflow in nearly three years, according to FactSet. The sudden inflow followed weeks of tepid activity in gold-backed ETFs.


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