The Strategist

Investors flee gold on Fed hikes

06/19/2018 - 17:21

Total assets of funds investing in gold fell to a two-month low, approaching a level of 2,200 tons. The tightening of the monetary policy of the US Federal Reserve System (FRS) against the background of lower inflationary fears is forcing investors to cut investments in precious metal. As a result, the metal’s value returned to a minimum this year, being fixed below $ 1280 per troy ounce.

Ken Lund
Ken Lund
The latest data from the Bloomberg agency indicate that the assets of index funds investing in gold fell to a minimum value in the last two months. As a result of Friday's trading, they dropped by 1500 tons, to 2205.5 tons. This is the minimum value since April 11. Since the beginning of June, when assets reached a local peak, they fell by almost 27 tons. The main outflow of client funds, as usual, fell on the world's largest stock market SPDR Gold Trust. During this period, its assets have decreased by 22 tons, to 828.8 tons, the minimum value from February 22.

Tus, the investors won back the results of the meeting of the US Federal Reserve and the European Central Bank that ended last Wednesday. As most analysts expected, the US regulator raised the rate by 0.25 percentage points, to 1.75-2%. At the same time, the Federal Reserve raised its forecast for GDP growth this year from 2.7% to 2.8%. In addition, most members of the committee voted for two more rate increases before the end of the year. In turn, the ECB promised to keep rates at a minimum level for at least another year. The contrast in the monetary policy of the two regulators led to a sharp increase in the dollar rate.

According to Reuters, last Friday the price of gold decreased by almost 2%, to $ 1278 per troy ounce, the minimum value since the end of last year. On Monday, the precious metal’s quotes remained near this mark. The investors made a choice in favor of the US currency, and, apparently, this trend will continue until the rates in the US will grow. Further strengthening of the dollar gives gold very little chance of growth in quotations, market participants say.

In such conditions, investors ignored geopolitical risks that grew last week. Last Friday, the US imposed a duty of 25% on imports of goods from China for $ 50 billion a year. China, in turn, announced introduction of symmetrical duties on American goods. "To the players’ surprise, gold has not benefited from increased tensions in foreign trade relations," says Carsten Menke, a commodities market analyst at Julius Baer.

Analysts explain the anomalous behavior of metal prices by the decrease in inflation expectations against the background of a collapse in oil prices, which occurred last week. Last Friday, the cost of the nearest futures contract for Brent crude oil fell by almost 4% and, after a six-month break, fell below $ 75 per barrel. This was facilitated by expectations of easing the terms of the OPEC + deal, which may be announced this week. "Oil prices have an effect on gold quotes at real interest rates, which decrease with inflation and vice versa," Carsten Menke said.

In anticipation of further tightening of monetary policy by central banks, investment demand for gold will continue to decline, analysts say.