May 8, 2021

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Gold hits eight-month low as higher bond yields reduce its appeal

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The price of gold hit its lowest level in more than eight months on Tuesday as signs of a global economic recovery and rising bond yields reduce the attractiveness of the precious metal.

The price of gold fell to a low of $ 1,707 per troy ounce, down 18% from a high of $ 2,072 in August, as investors reduced their holdings in the widely regarded metal. as a safe haven asset.

Holdings in gold-backed exchange-traded funds, products that offer exposure to gold but can be bought and sold like a stock, fell 14 tonnes on Monday, the largest outflow seen this year , according to Commerzbank.

Gold has been hit by a recovery in global equity markets and expectations of continued stimulus from global central banks as economies recover from the heavy toll of Covid-19.

Gold does not provide a flow of interest payments, so it tends to perform poorly as yields rise on other assets such as bonds. we real returns, which are adjusted for inflation expectations, have risen recently as investors expect President Joe Biden’s $ 1.9 billion coronavirus stimulus package to fuel stronger price growth in states -United.

“We see the rise in bond yields as a sign of economic optimism, which has also prompted gold investors to sell some of their positions,” said Carsten Menke of Julius Baer.

Carsten Fritsch, analyst at Commerzbank, said that “gold’s reputation appears to have been significantly tarnished by heavy losses in recent weeks, as evidenced by ongoing exits of gold ETFs”.

At the same time, gold faces increased competition from cryptocurrencies such as bitcoin which some investors see as a hedge against inflation, analysts at Citigroup say. The price of bitcoin has risen 55% this year to $ 49,000.

Still, the drop in the price of gold could lead to a pickup in physical demand for gold in the biggest consuming countries of India and China, analysts say. Last year, demand for gold fell to its lowest level in 11 years, according to the World Gold Council, driven by a slowdown in jewelry sales.

Goldman Sachs has said the price of gold is close to its pre-pandemic level in currencies other than the US dollar. Additionally, the price of gold in China – the world’s largest consumer of gold – is higher than the global market, which could boost gold imports.

For investors, the pace of any rise in inflation is likely to be the key to gold’s fortunes. If inflation rises more than expected, it could increase the attractiveness of gold, as the metal is seen as a hedge against inflation.

Jeffrey Currie, analyst at Goldman Sachs, said investors could switch from bonds to gold if “the emphasis on the risks of exceeding inflation increases”.



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