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Careful what you wish for…
(Kitco News) - Analysts have been warning investors that the gold market was due for a pullback for weeks, so while the magnitude of this week's selloff has been surprising, the direction isn't.
As January ended, gold saw the best start to the year in a decade, but momentum shifted abruptly as February kicked off, and the precious metal is looking to end the week with a 3.5% loss, a heck of a way to end a six-week winning streak.
The selloff in gold started on Thursday, but prices dropped like a stone Friday after the Bureau of Labor Statistics said the U.S. economy created 517,000 jobs last month, massively beating expectations. Economists were expecting to see job gains of around 193,000.
Gold's reaction to the shocking employment numbers indicates that the precious metal's fate remains tied to the Federal Reserve and the U.S. dollar. Economists note that if the labor market remains strong, the U.S. central bank will be forced to maintain its aggressive monetary policies longer than expected.
Currently, markets are expecting the Federal Reserve to raise interest rates one more time in March. Markets are also pricing in a potential rate cut by year-end. However, these expectations could start to shift following this employment report.
While U.S. monetary policy remains a significant headwind for gold, one thing investors learned this past week, is that there is more to the precious metal than just investment demand.
This week the World Gold Council highlighted the growing depth of the gold market as physical demand for the precious metal grew 18% last year. The market was led by solid bullion purchases from retail investors. Central banks also had a voracious appetite for gold in the second half of the year.
According to the WGC, central banks bought 1,136 tonnes last year — the most since 1967. According to George Milling-Stanley, chief gold strategist at State Street Global Advisors, central bank demand is not going anywhere anytime soon and this will put a solid floor in prices.
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Sentiment in gold market continues to cool as prices end the week down 3.5% |
"Emerging markets central banks, on average, have something like two-thirds of their reserves in dollar-denominated assets and less than 5% in gold. And they want to change that ratio. They want fewer dollars and they want more gold," he said.
The International Monetary Fund is also taking notice of central banks' new interest in gold. In a recently published working paper, the IMF noted that fear of economic sanctions is pushing nations to diversify away from the U.S. dollar.
With this support in the marketplace, even in the current environment, Milling-Stanley said that it appears gold is on track to push back above $2,000 an ounce this year.
Milling-Stanley isn't the only one who is bullish on gold. Goehring & Rozencwajg managing partner Leigh Goehring told Kitco News' Anna Golubova that inflation will be a decade-long problem, triggering a new record-high price in gold.
"Gold is going to hit record highs this year,” he said.
Of course, not all analysts are bullish on gold. This week the London Bullion Market Association released its annual gold price survey. Members of the LBMA see gold prices averaging the year $1,859 an ounce.
While gold has room to fall a little further, there is long-term bullish sentiment in the marketplace that is difficult to ignore.
