Negative Interest Rates A Boom For Gold Buyers

Gold soared on Wednesday trading as high as $1141 as oil prices plummeted again only to reverse course later in the US session as oil goes so does gold these days. Gold drifted back down a bit but held on to a good deal of its gains to close at $1139. At this writing gold is up 1.09% after lackluster US data helped spook the markets. The ADP payroll data reports 205K new jobs beating expectations but ISM non-manufacturing data printed at 53.5 well below forecast. This was followed by the EIA weekly oil inventory which showed a larger gain than expected. Silver follow gold gaining 406 points to 14.705. Platinum soared over $25 to trade at 880.95.

Gold, typically priced in U.S. dollar, has been rallying since the start of the year, up more than 7%. Wednesday, gold futures managed to hit another fresh three-month high as mixed U.S. economic data was released and the dollar weakened. The US dollar plummeted falling 1.38 points of 1.39% to trade at 97.50.

Gold and the greenback have historically been inversely correlated, so when the dollar moves higher, gold tends to suffer, and vice versa. Since the start of the year, the dollar index (DXY) has been struggling to breach the key 100 level, but is only down roughly 1.3%. However, on Wednesday, the DXY managed to post its largest daily loss since early December, which has helped push gold to levels last seen in early November.

Gold, an asset that thrives on uncertainty, has gained more than 6% since the start of 2016 on concerns over the growth outlook, especially in China, after losing 10.4 percent in 2015.

“I think the main driver we are seeing is the weaker dollar, based on continuing uncertainty about the global economy,” said Robin Bhar, an analyst at Societe Generale.

The dollar hit its lowest against the euro since last October and wiped out recent gains against the Japanese yen after soft US services sector data and comments from the Federal Reserve’s William Dudley prompted the market to scale back expectations for interest rate rises. The euro gained over 150 points to trade at 1.1067 its highest level this year.

Financial conditions have tightened considerably since the Fed raised interest rates in December, and if that persists policymakers would have to take that into consideration when they meet in March. The near-term outlook for gold will be largely influenced by the pace of US interest rate rises. Higher rates would make gold less attractive as it would increase the opportunity cost of holding non-yielding assets.

According to currency strategist Boris Schlossberg of BK Asset Management, “Negative interest rates have provided a fundamental reason to own gold. Just think about it: If you own gold and it stays stationary for a period, that’s going to beat cash in Japan or Switzerland.”

The basic idea is that gold and cash compete for a similar pool of investors’ money. If the central banks implicitly or explicitly causes cash to yield negative returns, then gold will look better in comparison.

Now, gold also grants a negative return in practice, because it costs money to store safely. But it still becomes relatively more attractive.