An August 5th report from FactSet Insight titled The Decline of Gold: Where Will Prices Go Next? notes that gold hit a five-year low of $1085 per ounce last week, and is in the midst of a multi-month slump, including a 6% 10-day slide last month. FactSet research analyst Andrew Birstingl takes a closer look at the factors behind the selloff in gold and where gold prices may go from here.
Gold prices hurt by strong dollar and low inflation
Birstingl argues that gold prices have been hurt by the strong U.S. dollar. He notes that gold is priced in U.S. dollars, so when the dollar gets stronger, it makes gold more expensive to buyers using other currencies, which spas demand. One U.S. dollar was equal to 0.91 euros and 123.96 yen as of end of day Monday, meaning the dollar was up 10.28% and 3.39% for the year to date. The U.S. greenback is also 6% above its one-year average (0.85 euros and 116.59 yen) compared to both currencies.
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Low global inflation is another factor weighing on gold prices. Gold is known as a hedge against inflation, which means in the current low-inflation environment, investors are less interested in gold. The U.S. experienced an increase in core inflation of 1.77% in June year over year. This is a slight move up from the 1.73% year-over-year gain in May, but inflation is still well under the Fed’s 2% target. Moreover,, the core PCE price index, which the fed watches closely, was only 1.29% in June. Core Inflation was also quite mild in the Eurozone as it reported a 1% year-over year increase in July, still under the five-year average of 1.14% and far from the European Central Bank’s target of around 2%.
Seasonality and fed rate hike canceling out each other may lead to little change in gold prices
According to Birstingl, it possible that gold prices won’t move very far up or down as seasonality factors ad fears about the looming Fed rate hike in effect cancel each other out.
Gold isn’t typically seen an investment that follows an obvious seasonal trend throughout. That sid, examining historical pricing back to the mid-1970s, some seasonal trends for gold can be seen. FactSet’s Seasonality report shows that September was the best month for gold on average going back 40 years. Gold saw a 40-year average monthly return of 2.36% in September, which was 38% higher than the next best performing month (November at 1.71%). Also of note, looking back to 1975, gold prices enjoyed a positive monthly performance in 27 out of 40 years in September, the largest number of any month.
Also of interest, August was right behind September with 26 out of 40 years of of positive returns. August was the third best performing month in terms of 40-year return, up 1.25% on average.
Another factor that could impact on gold prices is the likelihood that the Fed boosts interest rates in September (or later in the year). The arguiment goes that an interest rate hike (or two or three over six months) could lead to further declines in gold, as investors move out of no-yield assets like commodities and put their money into interest-bearing securities such as bonds or even money market funds. Birstingl points out, however, that there is only limited historical evidence supporting a correlation between fed rate hikes and declines in gold prices.