Gold’s impressive rally since late last year already is facing a challenge: renewed confidence in the U.S. economy and a rebound in stocks.
The S&P 500 sank 14% in the fourth quarter, driving investors into safer assets. Gold futures reaped the benefits, rallying 7.3%. Prices are currently near their highest level since June.
But analysts say that looking into 2019, investors remain largely confident that the U.S. economy will continue expanding. That means many likely will opt to ride out the volatility in share prices, rather than pile into havens such as gold.
The precious metal also has benefited from recent Federal Reserve comments that the central bank is willing to hit the brakes on its interest-rate increases in 2019 if growth slows. When rates don’t rise as rapidly, gold becomes more attractive relative to yield-bearing securities such as Treasurys. A softer dollar also lifts the metal’s appeal by making it cheaper for overseas buyers.
Yet those same Fed comments also have boosted stocks and other risky assets this year—a development that could potentially lure investors back into such markets.
In other words, the gold market risks a repeat of what happened during much of last year. Faith in U.S. growth dampened demand for bullion. Prices tumbled as much as 10% last year, hitting a roughly 18-month low in August. The S&P 500 climbed as much as 9.6%, hitting multiple records.
On Thursday, gold fell for a second consecutive session, while the benchmark equity gauge rose for a fifth straight day.
With gold, “the buying we’re seeing come in is cautious,” said Bob Haberkorn, senior market strategist at RJO Futures. “People are buying it mostly because of what’s going on with the Federal Reserve. That’s a different type of buying.”
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The demand picture is mixed. Flows into gold-backed exchange-traded funds rose late in 2018, topping $3 billion last month for the first time since April, according to the World Gold Council.
But hedge funds and other speculative investors have remained wary. Bullish bets on prices barely exceeded bearish wagers on gold during the week ended Dec. 18, according to the latest figures from the Commodity Futures Trading Commission.
That is a shift from the second half of last year, when bearish bets topped bullish ones, but steady U.S. economic data or a resolution to the U.S.-China trade fight could quickly improve the outlook for global growth, souring sentiment toward gold.
Demand for physical bullion among individual investors also has been lackluster. Last year, annual sales of American Eagles, a popular gold coin that is a proxy for retail sales, fell to their lowest level since 2007, U.S. Mint data show. The weakness continued late into the year.
Prices still haven’t cleared the closely watched $1,300 level, indicating the metal could be stuck in its current range.
“If the Fed does in fact turn neutral to dovish, the rally in gold will be in contained because equities will also turn higher,” Mr. Haberkorn said.
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