Gold Is Having Its Best Month Since Last Summer. Can the Rally Continue?

While investors have largely been focused on the dazzling, yet volatile world of cryptocurrencies in recent weeks, gold has been quietly grinding higher.

In the past month, the precious metal has climbed roughly 7%. On Wednesday, gold prices settled above $1,900 an ounce, breaching that important resistance level for the first time in around five months and turning positive for the year to date.

However, it might be hard for gold to stay above that key $1,900 level. That was evident on Thursday, when gold for June delivery fell $9.40 to around $1,892 an ounce amid better-than-expected U.S. jobless claims, a steady dollar, and higher Treasury yields. A strengthening dollar tends to make gold more expensive to foreign buyers, while rising bond yields reduce its attractiveness for some investors as it offers no yield.

Gold is headed for its best monthly performance since July.

The “$1,900 mark clearly still holds great allure,” Carsten Fritsch, commodity analyst at Commerzbank, told clients in a note Thursday. But he said investors face plenty of data for the remainder of the week that has “the potential to push the dollar and yields up or down, and by extension gold.”

On Friday, investors will get the important personal consumption expenditure deflator, the Federal Reserve’s “preferred inflation measure,” Fritsch noted.

“Recently a number of Fed representatives …had hinted that a discussion about tapering is drawing ever closer,” he said. “If the aforementioned data turn out to be robust, the debate could gather pace, strengthening the dollar and yields, and thus precluding any further rise in the gold price.”

Fans of Bitcoin and gold have at times debated which is the better store of value and inflation hedge. Many investors have been drawn to cryptocurrencies this year, which helped push Bitcoin to a record above $64,000 before a correction set in earlier this month, leaving it around 40% lower.

Both gold and Bitcoin offer protection against official central bank money, but without a yield of their own, neither offer any potential reward outside of a positive price movement, Société Générale ‘s head of global asset allocation Alain Bokobza and strategist Arthur van Slooten told clients in a May 20 note.

Gold’s place in an investment portfolio is much better, they said. Bitcoin risks are to the downside, given past stratospheric price movements, potential new regulatory moves from central banks, and environmental concerns over mining for coins. Plus gold’s role as a haven remains strong, they argue.

“In the event of rising inflation, gold can partially offset capital losses on bonds. Also, in the event of runaway inflation (not our expectation) or a return to deflation (not our scenario either, but arguably still central banks’ biggest fear), goldhas a protective role in partially offsetting losses on equities,” Bokobza and Van Slooten wrote.

J.P. Morgan strategists have also found that investors have been shifting away from Bitcoin and moving back into gold over the past month, reversing a trend of the previous two quarters. The reasons for that aren’t clear, said the team of strategists led by Nikolaos Panigirtzoglou, in a May 18 note discussing gold and Bitcoin.

“Perhaps institutional investors are fleeing Bitcoin as they see its previous two-quarter uptrend ending and thus seek the stability of traditional gold away from the rapid downshifting of digital gold,” J.P. Morgan strategists said. “Or they perhaps view the current Bitcoin price as too high relative to gold and thus do the opposite of what they did in the previous two quarters, i.e. they sell Bitcoin and buy gold.”

Barbara Kollmeyer

source:barrons.com