Thursday June 27, 2019
The gold market is seeing its second day of selling after hitting a six-year high, but there are still fundamental reasons to support the current gold price, according to the World Gold Council (WGC).
June has been an action-packed month for the yellow metal with prices – at one point – up 10%. Despite the latest selling pressure, gold prices are still holding critical support above $1,400 an ounce. August gold futures last traded at $1,408.20 an ounce, down 0.51% on the day.
While this past month’s rally has been impressive, Juan Carlos Artigas, director of investment research at the WGC said in a telephone interview with Kitco News, that investors should look past gold’s momentum and look at factors behind the drive.Artigas said that gold is having a stellar month because of the shift in global monetary policies and in particular the 180-turn from the Federal Reserve.“Risk and uncertainty remain elevated and in an environment with low opportunity costs, gold will continue to be an attractive asset to own,” he said.
“Look at how fast markets have changed in only one year,” he said. “Last year markets at this time markets were still pricing in rate hikes for 2019. Six months ago they expected the Fed to be on hold and now they are looking for cuts through the rest of the year.”
Although expectations for a 50 basis-point cut next month have dropped in recent days, the market still sees looser monetary policy in the months ahead. The CME FedWatch Tools shows that markets continue to see up to four rate hikes by the end of the year. The easing bias in the marketplace is keeping U.S. 10-year bonds yields near a 2.5-year low at 2%.
Although the Fed is trying to manage market expectations, Artigas said that it is unlikely they will go against the current trend.
“The Fed is not going to surprise markets because they don’t want to create unnecessary volatility,” he said. “Additional volatility is not helpful.”
Artigas added that gold also looks attractive in an environment where central banks will have to use more unconventional monetary policy tool to stave off the growing chance of a recession.
“Given where rates are, central banks can only cut so much. They will need to invent new tools to support growth and we don’t know what impact that will have,” he said.
Although loose monetary policy is also pushing liquidity to equity markets, Artigas said that investors are becoming more aware of holding defensive assets.
“Equity valuations are extremely high, especially when you consider where bond yields are,” he said. “Traders don’t want to miss out on higher stock prices, but they are also turning to gold to mitigate their risks,” he said.
By Neils Christensen For Kitco News