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Lower rates might hurt the dollar but boost gold

New York

EVERYWHERE, it seems, the world has been steeped in turbulence and strife, and that might seem to be the perfect setting for a major rally in gold, long considered an investment haven.

But the price of gold lately has been surprisingly stable. Despite a surge in June, the price has been largely confined to a range of US$1,150 to US$1,350 an ounce. And though gold ascended to close the second quarter just over US$1,400 an ounce, it was still almost US$500 an ounce lower than its peak closing price, reached in 2011.

That may be because of the relative strength of the dollar and of the stock market, which have limited gold's appeal, market strategists say, but that could easily change and gold may well have its day once again.

During the long bull market that started a decade ago, however, mutual funds and exchange-traded funds that invest in gold operations have generally been laggards. And many precious metals equity mutual funds have actually lost money for investors: over the last five years through the end of June 2019, the average fund declined an annualised 2.4 per cent, Morningstar Direct reports.

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Over three years, it is even worse: total returns were a negative 5.12 per cent. The leading gold ETF, the SPDR Gold Trust, has done a bit better, returning an annualised 0.99 per cent over the last five years through June, 1.77 per cent over the last three. By contrast, the SPDR S&P 500 ETF returned an annualised 10.6 per cent over the last five years and 14.07 per cent over the last three through the end of June.

Gold's failure to rally in the face of global turbulence earlier this year wasn't what some had predicted. "A lot of people expected gold to respond," said Michael Bradshaw, a manager of the Wells Fargo Precious Metals mutual fund. Gold's tepid response may be because other forces - notably the dollar - have weighed on prices. "There are so many other drivers these days," said Georgette Boele, currency and special metals strategist with the Dutch bank ABN Amro.

Shanquan Li, manager of Invesco's Oppenheimer Gold and Special Minerals mutual fund, estimates that geopolitical tensions affect no more than 30 per cent of gold's recent price moves, while the dollar has been dominant. A strong dollar tends to weaken interest in gold because both have served as havens in terms of stress, he said. "The dollar has been strong since 2014," Ms Boele said, which may be why gold was unable to mount a major advance, at least until now.

Ms Boele forecasts gold prices of US$1,500 an ounce by the end of next year. But she says gold could rise faster if central banks keep cutting interest rates. Lower rates might hurt the dollar and help gold, though expectations of some rate cuts by the Fed are already baked into gold valuations, she said.

Central bank rate-cutting aside, she said, gold would be helped by "a massive sell-off of the dollar," perhaps caused by an equity market drop or rising concerns over debt, though she's not predicting that either will happen.

Joseph Foster, manager of the Van Eck International Investors Gold Fund, pointed to rising US government debt held by the public as a possible cause of a future increase in the price of gold. NYTIMES

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