Anxious Investors Seek Refuge in Gold
Metal pushes higher as shifting political scene unnerves some; an unusual divergence
Gold prices rose to their highest level in nearly three months on Monday, reflecting investors’ anxiety over a rapidly evolving global political landscape.
U.S. gold futures rose $11.50, or 0.9%, to $1,230 a troy ounce after France’s far-right leader Marine Le Pen reiterated her party’s commitment to pull France out of the European Union and to restore the franc as the country’s official currency.
Gold’s move higher in recent weeks has been remarkable, coming as it has during a period in which U.S. and global economic data have generally been improving. Some investors buy gold when political or economic uncertainty increases, believing the precious metal will hold its value better than other assets in shaky times.
A rocky start to U.S. President Donald Trump’s term has also discomfited some investors. Mr. Trump has clashed with U.S. allies such as Mexico, and some executive orders on immigration and refugees face legal challenges.
Gold’s rise is the latest illustration of how politics has re-emerged as a key driver of markets since last summer, following a years long period during which asset prices were driven largely by the actions of central banks.
“During the last couple of years, politics did not have much of an impact because they did not threaten the essence of the economic system,” said Edward Meir, a strategist at INTL FC Stone. “Now, it’s like a minefield out there. Lots of things can blow.”
Political uncertainty hasn’t been this high since a debt crisis hit Greece and threatened to spread throughout the European Union, Mr. Meir said. Demand for gold and other haven assets soared in 2011, driving prices to an all-time high of around $1,900 a troy ounce.
Besides France’s April 23 vote, challenges from anti-establishment parties loom in Dutch, German and Italian elections this year. Investors worry that populists leaders could close borders, tax imports or move to leave the eurozone, threatening to unravel a political and economic order that has held sway for decades.
Investors have responded by piling into gold, sending prices up 7% this year.
Net bets on a higher gold price by hedge funds and other speculative investors stood at 72,067 contracts last week, almost doubling since the beginning of the year, data from the Commodity Futures Trading Commission showed. Assets held by gold-focused exchange-traded funds tracked by Lipper were at $16.8 billion on Feb. 1, up 34% from their December lows. Gold for April delivery Monday posted its highest settlement since Nov. 10.
The regime shift may be a jarring one for markets. For the past several years, investors have taken their cues from the monetary policies of central banks such as the Federal Reserve and European Central Bank, which launched unprecedented economic-stimulus programs to spur growth in the aftermath of crises. Central banks typically strive to gain investors’ confidence by being transparent and predictable, often communicating their intentions in policy statements.
Politics tends to be much harder to predict. Many investors were caught by surprise by Britain’s June 2016 decision to leave the European Union and by Mr. Trump’s election later that year.
“With the crisis of nationalism, you have much more risk,” said Erik Knutzen, multi asset-class chief investment officer at Neuberger Berman Group LLC.
Meanwhile, silver prices rose 1.2% Monday to $17.667 a troy ounce, their highest settlement since Nov. 10. Silver futures are up 10.9% so far this year. Silver tends to rise more than gold when investors are nervous and to fall more than gold when they turn sanguine, reflecting factors including the lower price of silver on a per-ounce basis and the typically thinner trading in silver markets.
Besides getting a lift from heightened political uncertainty, silver has also benefited from expectations of a strengthening global economy. Silver is heavily used in manufacturing, making it generally more sensitive than gold to economic fluctuations.
The WSJ Dollar Index tumbled 2.6% in January. That decline came after Mr. Trump and members of his administration said the U.S. currency’s strength may hurt the country’s economy. Gold is priced in dollars and becomes more affordable to foreign investors when the U.S. currency declines.
A weakened dollar and heightened political concerns will drive gold to around $1,300 a troy ounce in the first six months of the year, analysts at UBS Wealth Management said in a note to clients.
Another boost for gold has come as investors temper expectations of how soon the White House will push through the infrastructure spending and tax cuts that Mr. Trump pledged during his campaign to make.
Some market participants believed those measures would have jolted the economy and led the Fed to raise interest rates at a faster pace. Gold struggles to compete with yield-bearing investments when rates rise.
But “people are now thinking this may be harder to do than they initially thought,” said Bart Melek, head of commodities research at TD Securities. “We shouldn’t expect this to happen right away.”
Gold prices rose Tuesday, boosted by weaker U.S. economic data and political uncertainty.
Gold for April delivery closed up 1.3% at $1,211.40 a troy ounce on the Comex division of the New York Mercantile Exchange. A weaker dollar and heightened political turbulence in the U.S. have lifted gold prices by 4.9% this month, their best percentage gain since June.
The Chicago Purchasing Managers Index, a gauge of manufacturing activity, fell to 50.3 in January from a reading of 53.9 a month before. The data helped push the dollar lower, providing a boost to gold, which is priced in the U.S. currency and more affordable to foreign buyers when the dollar falls.
“It’s a pretty big miss, and sparked a flight to safety,” said Bob Haberkorn, a broker at RJO Futures.
The Wall Street Journal Dollar Index was recently down 0.8% to 90.31.
With the Federal Reserve scheduled to conclude its monetary policy meeting Wednesday, traders have been keeping an especially close eye on U.S. economic data. A more hawkish view on monetary policy from the central bank would be detrimental for gold, as the metal struggles to compete with yield-bearing investments when interest rates rise.
At the same time, prices for the safe haven metal are also getting a boost from political turbulence in the U.S.
On Monday, the White House fired acting Attorney General Sally Yates, after she ordered government lawyers not to defend an executive order from U.S. President Donald Trump temporarily banning immigration from seven countries to prevent entry of potential terrorists.
Some investors believe that Mr. Trump’s move to restrict immigration and opposition to it have increased the appetite for gold, a popular destination during periods of political or economic uncertainty.
“The gold market is in thrall to the Donald Trump show,” said David Govett, head of precious metals at Marex Spectron in London.
The move followed days of protests in American cities and uncertainty about the details and the execution of the order.
“The perception in the marketplace is that [Trump is] a loose cannon,” said Mr. Govett. “No one wants to be short of gold.”
Silver for March delivery was up 2.3% at $17.54 a troy ounce. April platinum rose 0.3% at $996.50 a troy ounce. March palladium was up 2.2% at $754.30 a troy ounce.
Another factor driving Gold is Bond Markets
To see why gold has been on a tear, look to the bond market.
Though the precious metal is sometimes seen as the safe-haven investment choice of those who distrust the financial system, a lot of its price moves can actually be traced to something less fear-inspiring: inflation-adjusted interest rates.
That’s a factor explaining at least part of gold’s 5.7% climb this year through Monday to its highest since mid-November, analysts say.
“We think that the biggest driver of gold prices is absolutely real yields,” said Nicholas Johnson, a commodities portfolio manager at Pacific Investment Management Co., who published research on the topic in 2014.
Analysts say that typically, the higher real yields are, the less investors are willing to pay for an asset that doesn’t offer inherent income, like gold. The lower the yield offered by inflation-adjusted bonds, the less the trade-off in owning gold, and the more investors are willing to pay for it.
Some say that’s not the only factor driving gold prices. After all, there’s a lot of fear of unknowns in the world right now, one factor prompting investors to buy up gold. Plus, the U.S. dollar has been weakening recently, which tends to push gold higher.
But the negative correlation between gold and real rates — where gold falls as inflation-adjusted yields rise, and vice versa — is stronger than ever. The three-month correlation between daily changes in U.S. real yields and daily returns on gold is “unprecedented,” having fallen to the most negative in records going back to the middle of 1997, according to Bank of America Merrill Lynch.
And it’s not just gold prices. Gold miner stocks, which are typically leveraged to the price of gold, currently have their most negative correlation with real yields in records going back to 2007, according to Ned Davis Research Group. They came up with that calculation by looking at the 52-week correlation between weekly changes in the VanEck Vectors Gold Miners exchange-traded fund, and the 10-year real Treasury yield.
All of this helps explain how gold managed to rebound over the past month, even as stocks and other risky assets that shot higher after the election have largely traded in narrow ranges.
Immediately after the presidential election, inflation-adjusted bond yields jumped, and prices fell, as investors began expect more inflation under Donald Trump’s administration. Now, inflation expectations remain elevated, but real yields, as measured by the rates on long-term Treasury inflation-protected securities, have been paring their rise over the past month. Yields have generally come off their highs as investors begin to second-guess parts of the so-called Trump trade. As such, the performance of TIPS has begun to bounce back.
And as real yields fell, gold was poised to rebound.