Gold prices threaten to mark longest skid in 7 months

February 8, 2018

New York (Feb 8)  Gold futures on Thursday were headed lower, putting the commodity on track to market its longest succession of down days in about seven months as the U.S. dollar strengthens.

April gold GCJ8, -0.13%  retreated $2, or about 0.2%, at $1,312.60 an ounce, after scoring its lowest finish for a most-active contract since Jan. 9 on Wednesday and notching its largest single-session dollar and percentage loss since Nov. 20, according to FactSet data. Gold futures for the week were set for a decline of about 1.9%, which would put bullion on pace to log its steepest weekly drop since the period ended Dec. 8.

The downdraft for gold can be attributed to a pair of key factors: rising bond yields, which detract from gold, and a strengthening dollar, which makes the asset more expensive to buyers using weaker currencies.

The ICE Dollar Index DXY, +0.14% a measure of the buck against a basket of a half-dozen currencies, was up 0.2% at 90.41 and on track to post a weekly rise of 1.4%, representing its largest weekly gain since around November 2016.

Meanwhile, benchmark yields have been climbing to their highest level in around four years, with the 10-year benchmark yield TMUBMUSD10Y, +1.22%  at 2.85%. Higher government bond yields can compete for demand from investors against gold which doesn’t bear a yield and is viewed as a haven asset. Fear of a surprise in inflation, which can eat away at a bond’s fixed value, and concerns that the Federal Reserve may be quick to raise interest rates in the future, have helped to drive yields higher.

Those factors have helped to undermine gold despite a period renewed volatility that has seen wild swings in the Dow Jones Industrial Average and the S&P 500 index become more common after a protracted period of calm. Ordinarily, gold would draw bids from investors fretting about a volatile equity market.

Meanwhile, March silver SIH8, +0.10%  lost 2 cents, or 0.2%, to $16.218 an ounce. The exchange-traded SPDR Gold Shares GLD, -0.19% was off 0.4%, while the silver-focused iShares Silver Trust SLV, -1.53%  was down 0.5% in premarket trade.

Rising inflation would typically be a boon for gold, since it is often considered a hedge against rising prices, however, uncertainty about how quickly yields will rise and the degree to which inflation will resurface may be giving precious metals investors pause.

“The U.S. dollar’s gains along with Treasury yields over the last few days have had a particularly negative effect on gold, which broke support early in the week and sold off sharply along with many gold stocks. While many scratch their head at gold not moving higher during an apparently ‘inflationary’ environment like many claim we’re in, it’s important that real rates aren’t moving higher for gold to work. Near-term, the dollar moving higher along with yields is a definite negative,” wrote Mark Newton, technical analyst at Newton Advisors, in a Thursday research note.

In macroeconomic news, the Bank of England held its benchmark rates unchanged, which could factor in commodity and currency traders strategies throughout the session.


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