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Gold fell 1 percent to its lowest in 9-1/2 months in Asian trade on Friday, heading for a third consecutive weekly decline, on expectations of a Federal Reserve rate hike and as the dollar extended its bull run against the yen.
Spot gold was down 0.4 percent at $1,178.64 an ounce by 0604 GMT. Earlier in the session, the metal dropped 1 percent to mark its lowest since Feb. 8 at $1,171.21 per ounce.
"The dollar is firm and triggering some selling (in gold). There were some stops around $1,180 and they were all taken," said Ronald Leung, chief dealer at Lee Cheong Gold Dealers in Hong Kong. "There has been some physical buying, but that is not so strong and is not helping gold," Leung added.
Gold has collapsed in November, while cheaper haven silver entered a bear market, as investors embrace risk on the back of President-elect Donald Trump’s pledges to increase infrastructure spending and revitalize the economy. That’s helped spur U.S. equities to records. The Federal Reserve is poised to tighten monetary policy at its year-end meeting, invigorating the dollar, which rallied this week to the highest level since at least 2005.
Silver has been battered, too. Spot silver dropped to $16.1745 an ounce on Friday, the lowest level since June, before rebounding. The metal has declined more than 20 percent from the year’s closing high in August, meeting the common definition of a bear market.
Trumpflation Might Not Help Gold if Real Rates Keep Rising
Conventional wisdom held that the uncertainty that would follow a Donald Trump victory in the election would be very positive for safe-haven assets like gold, but since Nov. 8 the shiny stuff has fallen by more than 6 percent to below $1,200 per ounce.
And if gold's a hedge against rampant inflation, wouldn't the imminent installment of the inflation president also prove a boon?
That may be because although fears of (in/de)flation, the disintegration of civilization in general or the European Union in particular, food prices, investor sentiment, and bets on monetary disorder have all taken their turns in being cited as the key factor in gold investment theses, the behavior of real rates has proved far more important in explaining bullion's gyrations.
Eddy Elfenbein, portfolio manager at AdvisorShares Investments LLC and founder of Crossing Wall Street, has built a model predicting where gold prices will go based on the deviation of short-term real interest rates from their natural level. The Globe and Mail's Scott Barlow has also explained the relationship between the two assets on a number of occasions.
The thinking here is that the value of a hard asset with a yield of zero (net of storage costs) will be affected by the relative real yield on assets that are considered risk free, an alternative holding. In other words, the so-called opportunity cost of buying gold rises as real Treasury yields increase.
So if you want to know how the president-elect is changing the outlook for gold, looking at inflation-protected Treasury yields instead might prove more useful than searching for nascent signs of Trumpflation.
Reference: Bloomberg
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