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Gold falls to lowest level in five years on dollar strength

Source: AP | July 21, 2015, Tuesday | Online Edition

Investors are running out of reasons to own gold.

The price of the metal, which is often seen as a hedge against inflation and a weak dollar, slumped to its lowest in five years on Monday.

The dollar has rallied in recent months, diminishing the allure of holding gold. The US economy has been on firmer footing, and tumult in China's markets and Greece's debt crisis have failed to restore the metal's appeal as a haven from global turmoil.

The price of gold had surged in the years immediately after the 2008 financial crisis, topping out at nearly $1,900 an ounce in August 2011, as investors anticipated that the Federal Reserve's ultra-low interest rate policy and huge bond-buying program would undermine the dollar and lead to inflation.

That scenario didn't pan out.

Instead, inflation has remained subdued and the economy maintained its recovery, albeit at an uneven pace. That has boosted demand for the dollar.

On Monday the price of gold sank another $25 to $1,106 an ounce. That's about 40 percent below its recent peak and the lowest price since March 2010.

"It's the strength of the dollar, that's what's been drilling gold down this year," said Jim Steel, chief precious metals analyst at HSBC in New York.

When investors are worried about the outlook for the US and the global economy, they tend to favor gold, Steel said. But when the US stock and bond markets are strong, as they are now, investors don't really see a reason to hold gold which, unlike stocks and bonds, doesn't produce any income.

The dollar is strengthening as the Fed moves closer to raising interest rates for the first time in almost a decade. The prospect of rising interest rates and higher yielding US assets has boosted the allure of the US currency against other major currencies such as the euro and the Japanese yen.

The dollar has surged 21 percent against a basket of major currencies over the last year as central banks in both Europe and Japan have kept using economic stimulus to try and strengthen their economies. While the Fed is considering rate increases, interest rates will likely stay low in these regions for some time to come.

Fed Chair Janet Yellen has maintained that the central bank will probably raise its benchmark interest rate later this year if the economy continues to improve. She reaffirmed that view during a report to Congress last week. The Fed's benchmark interest rate has been near zero since December 2008.

Gold's allure as a store of value in times of crisis also appears to be fading. Neither the recent stock market crash in China nor the Greek debt crisis succeeded in restoring the appeal of gold.

Still, now may not be the best time for investors to dump their gold holdings, said Jim Paulsen, chief investment strategist at Wells Fargo Asset Management.

The price of gold is falling in part because many investors are becoming over confident in the resilience of the stock market and the US economy. That's exactly the time when investors should start being more cautious.

"One reason of the reasons that (gold) is attractive is that nobody thinks it's worthwhile anymore," said Paulsen. "That says that probably people have become complacent, which is exactly when you need gold."

Paulsen also says that a further strengthening of the dollar isn't a given. If the economic stimulus in Europe and Japan starts working, then the euro and the yen could actually reverse some of their losses against the dollar, damping the appeal of holding dollar-denominated assets.

 

 

 

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