Gold Slides Again as US Inches Towards Monetary Tightening

Kristian Rouz — Prices for gold are slipping for the second consecutive trading session on Monday, ending their latest winning streak, as banks and investors across the world are preparing themselves for costlier dollar-denominated borrowing. Moreover, fluctuations of gold prices since early 2015 have all been happening within the framework of $1,184.37/oz on 31 December to 1,302.25/oz on 22 January to this year's lowest at $1,149.57/oz on 17 March. Given that last 52 weekprice- range for gold is $1,132.16/oz — $1,345.17/oz, one could easing speak of a uneven stability in gold prices, where demand matches supply more or less, and outside factors are playing a decisive role.

As the US dollar been heading up during last 12 months, with the upward trend reconfirmed last Friday when as US Fed chair Janet Yellen vowed more tightening on the way this year, gold has been steadily losing most of its attractiveness. Global stock markets have been rallying consistently, posting most significant gains after both Japan and the Eurozone implemented a massive monetary stimulus. In these circumstances, nobody would want to keep their money in a ‘safe haven' asset, preferring extracting profits out of the benevolent situation instead.

Besides, as the US dollar is strengthening beyond all expectations, in the eyes of an investor it becomes closer to what we call ‘paper gold' rather than a simple currency. It is pretty safe and profitable to buy into the greenback. At the same time, a stronger dollar is weighing on gold valuation, as it is denominated in dollars.

On Monday, gold prices retreated 1%, down to $1193.10/oz against the backdrop of the nearing US Fed hike of the base interest rate. Last week, the yellow metal had been advancing for seven straight sessions amidst Fed policy uncertainty, its biggest advance since 2012, proving again that gold only goes up during periods of uncertainly, giving way to other assets in clearer circumstances.

Ms. Yellen's remarks will trigger a longer plunge in gold valuation as investors are more into the greenback now.

In Singapore, gold with immediate delivery is slightly dearer, at $1,194.40/oz, but the downward pressure is mounting. Nonetheless, this coming wave of gold depreciation will not be steep as expectations of a June rate hike by the Fed are slowly evaporating (at least, before this Firday's jobless data). If nothing promising happens to the US economy soon, the Fed might consider hiking base rate in September rather than in June, giving way for some short-lived dollar pessimism.

Nonetheless, gold is not a better investment asset than the greenback now. Commodities markets are in a slump due to weak demand. Palladium is at a 5-month low, and oil is down as well. As global manufacturing is slowing, turning towards a more well-balanced growth, mostly in the developed nations, raw materials have to compete against the growing segment of recycled materials. The first world is re-using everything these days. Unfortunately for gold as an asset, its valuation is closely associated with commodities prices and commodities markets, being yet another factor of downward pressure on its valuation.

At the same time, worldwide banks are preparing for emergency cases of sudden hikes in interest rates, as indicated by recent signals coming from the Basel Committee on Banking Supervision. Global central banks are keeping interest rates at their historical lows as a stimulus to their real economies, however, not all of the regulators will be ending their stimuli as gradually as the US Fed.

What this means for gold as an asset is that, since regulators expressing concern of whether commercial banks can withstand a sudden interest rate hike, the latter might well be an option. In such a situation, gold will take a deeper plunge, far below its current low threshold of $1,132/oz, because costlier credit will push the value of the monetary equivalent up effectively, and everyone would be eager to buy into that.

Now, the Bloomberg Dollar spot added 0.2% Monday. It is expected to advance 5.5% this quarter. With so much pressure against gold, and brighter prospects of the greenback it is not hard to figure out what the markets will be buying into. Gold for June delivery slid 0.6%to $1.194.10/oz on the Comex.