Gold Bulls Look Past Fed Rate Hike, Load Up on ETFsBy
Inflows send holdings in the SPDR Gold fund to six-month high
Goldman pushed back forecast for third rate hike to December
Gold bulls who bet that the U.S. Federal Reserve may take a more cautious approach in monetary tightening appear to be on the money, judging by the latest batch of disappointing economic data.
Figures released Wednesday showed the U.S. consumer-price index unexpectedly fell in May, while retail sales slipped the most since the start of 2016, helping gold end its longest losing streak in three months. Even before the data that sent the dollar tumbling, investors already poured $675 million into SPDR Gold Shares last week, taking total bullion holdings in the largest exchange-traded fund backed by the metal to a six-month high.
While traders are pricing a 91 percent chance of an increase in borrowing costs when U.S. policy makers conclude their meeting Wednesday, skepticism is growing the Fed will be aggressive in monetary tightening amid growth risks.
“They may start throwing a little bit of caution into their forward-looking statement because the first quarter was definitely disappointing for the Fed and for the U.S. economic recovery,” said Chris Gaffney, the St. Louis-based president of EverBank World Markets, referring to Fed officials. “There are several things that could push gold higher.”
Gold futures have climbed 11 percent this year amid growing doubts that President Donald Trump’s economic agenda, including tax cuts, will make it through Congress. Adding to the metal’s tailwinds are political uncertainties surrounding the U.K.’s negotiations for its exit from the European Union after Theresa May lost her parliamentary majority in last week’s election, and a diplomatic spat in the Middle East.
Earlier this month, Goldman Sachs Group Inc. pushed back its forecast for a third rate increase this year to December from September. Fast money is wagering for a similar timetable too, with positioning for short-term interest rates starting to shift toward December after disappointing U.S. jobs data released June 2.
Higher rates curb the investment appeal of non-interest bearing assets like gold. Bullion futures for August delivery traded 0.9 percent higher at $1,280 an ounce at 9:39 a.m. Wednesday on the Comex in New York. While prices fell for five straight sessions through Tuesday, losses were limited to 2.2 percent in that period as the metal’s 30-day volatility languishes not far from the lowest since 2014.
A series of amber lights about the health of the U.S. economy have started to flash. Growth slowed to 1.2 percent in the first quarter, from 2.1 percent in the prior three months. The trade deficit widened in April, which may restrain economic growth this quarter.
On Tuesday, government data showed wholesale prices were little changed in May from the prior month, signaling a pause in inflationary pressures in the production pipeline. The Fed’s preferred inflation gauge -- the personal consumption expenditures price index -- slowed to 1.7 percent in April, indicating a loss of pricing momentum.
Lael Brainard, a Fed governor, said in late May that if inflation remains soft she may reassess the path forward for monetary policy, even as the global economic outlook brightens and U.S. growth looks poised to rebound.
Signs of increased stock-market volatility, relatively lower crude oil prices and declines in U.S. Treasury yields may restrain the Fed after Wednesday, Bloomberg Intelligence analyst Mike McGlone says, signaling bullion may be set for further gains.
Since late 2015, increases in U.S. borrowing costs were followed by a rebound in gold prices, fueling optimism a recovery is in the offing.
“The last three hikes have marked cycle lows for gold,” Suki Cooper, an analyst at Standard Chartered Plc, said in a June 12 note. “Coupled with a softer physical floor in coming weeks, dips towards $1,200 an ounce are likely to offer attractive entry levels again.”