The curious case of falling gold prices

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Premarket stocks: The curious case of falling gold prices | CNN Business

It should be the perfect time to own gold. The yellow metal has historically rallied when inflation is high, since it’s a physical investment that can serve as a store of value. It’s also usually a firm favorite during periods of geopolitical uncertainty, when it’s seen as a safe haven.

But gold prices haven’t surged. In fact, they’re down almost 20% from their recent March peak. That puts gold on the cusp of a bear market.

“Investors don’t have much appetite to hold gold in the current environment,” Warren Patterson, head of commodities strategy at ING, told me.

Breaking it down: Gold prices skyrocketed in early March as fears about the consequences of Russia’s invasion of Ukraine mounted. Since then, however, other market dynamics have come to the fore.

Call it the Fed effect. The central bank has been aggressively hiking interest rates in a bid to bring down inflation, which remains stubbornly high, especially as the war in Ukraine bolsters food and energy prices.

The Federal Reserve increased rates on Wednesday by three-quarters of a percentage point for its third consecutive meeting, an unprecedented move. It also signaled that significant hikes could be on the table in November and December.

That action pushed the US dollar to a new two-decade high. The greenback is up 16% against a basket of major currencies so far this year, a huge rise.

Those movements have been hurting stocks. But they’re also affecting gold.

That’s in part because transactions of commodities, including gold and other precious metals, usually happen in dollars. A stronger currency makes it more expensive for foreign investors to buy in, and can reduce demand, pushing down prices.

Another factor is the effect of the Fed’s tough hiking cycle on US government bonds. Yields on these bonds, which move opposite prices, have jumped as the Fed has tightened policy. The yield on the benchmark 10-year US Treasury was last at 3.77%, up from about 1.5% at the start of the year.

Gold also competes with government bonds as a safe haven investment. And when investors can get better returns on the latter, the former looks far less attractive.

Patterson put it this way: “If you’re raising interest rates, what would you rather hold, gold or something that’s going to provide you with yield?”

Sign of the times: This week made clear that central banks do not plan to change their tack any time soon, presenting the task of getting inflation under control as their priority.

After the Fed announced its latest rate increase, others followed. The Bank of England pushed rates in the United Kingdom to their highest level since 2008. Sweden, Indonesia, Vietnam, Norway and Switzerland all hiked, too.

That means gold is unlikely to launch a comeback in the near term. For that to happen, the picture on inflation would need to shift, Patterson said.

“It’s really hit home this week,” he said. “You’re seeing monetary tightening across the board from most central banks out there.”