Prophets

Gold Is Bound to Disappoint the Bulls -- Again

Throw out all the fancy analysis and realize that gold is an emotional trade.

Don't believe the hype.

Photographer: Andrey Rudakov

Gold has been trending higher, and is again flirting with $1,300 per ounce. For traders, the question is whether to build their positions from here in anticipation of further gains, or is this just another teaser that presages yet another turn lower for the precious metal?  The fundamentals might suggest the former, by traders would be well advised to expect the latter.

After breaking through a six-year downtrend line, gold rose last week to its highest level since Nov. 4, and is up an impressive 10.5 percent this year. There are a number of reasons why gold is in demand. For one, it's been known as an inflation hedge. And while there’s no real inflation to speak of at the moment, it’s more about expectations as evidenced by money flowing into U.S. Treasury Inflation-Protected Securities and other inflation-linked instruments.

Secondly, gold, like all global commodities traded in U.S. dollars, is negatively correlated to the greenback, which has been losing value since February due to mounting doubts that President Donald Trump will succeed at pushing his pro-growth agenda through Congress. 

Third, gold is considered an alternative to fixed-income assets when interest rates are low,  which is the case in much of the developed world.  The European Central Bank charges banks 0.4 percent to hold their cash overnight. Citizens in Sweden, Switzerland and Denmark can be charged to keep their money in banks. JPMorgan said last week that the amount of negative-yields bonds globally is ticking back up again, reaching $9.8 trillion.

Fourth, gold seems to be the only commodity in the complex showing any signs of strength, thus appealing to commodity traders. That also applies to volatility, which has broken the downward trend seen in other parts of the commodities markets.

Fifth, the U.S. stock market is trading at or near record highs, leading more pundits to warn investors of overvalued sectors (think tech) and to predict a market crash. Unlike equities, gold doesn’t have an inherent earnings per share value play, justifying its inclusion as a haven asset.

And sixth, there is plenty of global geopolitical risk to popularize haven investments, from the spreading of radical Islamic terrorism, to unpredictable North Korean, Philippine and Russian strongmen, to Brexit and the potential for other European Union members to exit, to Gulf Cooperation Council nations severing ties with Qatar and heightening tensions in the Middle East. Add to that global warming, climate risk and wars over water. Then consider the U.S., where a special counsel has been set up to investigate Russian meddling in the 2016 election and where hopes are fading for a economic bump from President Donald Trump's pro-growth fiscal agenda.

Surely the physical demand for gold is picking up as noted by the number of new gold vaults opening in Europe. Gold backed exchange-traded funds are seeing greater inflows. Gold is attractive because of the lack of faith in sovereign currencies as seen in the rising value of Bitcoin and other cryptocurrencies.  There’s also rising demand for gold in China, the world’s largest gold market, driven by currency risk and concerns over property, share and bond markets amid a government drive to reduce leverage.

So, with so many valid reasons for gold to rally further, why am I a doubter?  The most rudimentary reason is that gold is also an emotional trade and $1,300 is a round number. One need not be a superstar technical analyst. Just consider that for both psychological and systematic reasons, traders and algorithms like to sell on landmark numbers that also serve as a testing ground for a rally’s sustainability. Looking back at gold over a 10-year period, these round numbers were persistently prodded.

Bloomberg Prophets Professionals offering actionable insights on markets, the economy and monetary policy. Contributors may have a stake in the areas they write about.

    To contact the author of this story:
    Shelley Goldberg at shelleyrg3@gmail.com

    To contact the editor responsible for this story:
    Robert Burgess at bburgess@bloomberg.net

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