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Everywhere, it seems, the world has been steeped in turbulence and strife, and that might seem to be the perfect setting for a major rally in gold, long considered an investment haven.
But the price of gold lately has been surprisingly stable. Despite a surge in June, the price has been largely confined to a range of $1,150 to $1,350 an ounce. And though gold ascended to close the second quarter just over $1,400 an ounce, it was still almost $500 an ounce lower than its peak closing price, reached in 2011.
That may be because of the relative strength of the dollar and of the stock market, which have limited gold’s appeal, market strategists say, but that could easily change and gold may well have its day once again.
During the long bull market that started a decade ago, however, mutual funds and exchange-traded funds that invest in gold operations have generally been laggards. And many precious metals equity mutual funds have actually lost money for investors: Over the last five years through the end of June 2019, the average fund declined an annualized 2.4 percent, Morningstar Direct reports.
Over three years, it’s even worse: Total returns were a negative 5.12 percent. The leading gold E.T.F., the SPDR Gold Trust, has done a bit better, returning an annualized 0.99 percent over the last five years through June, 1.77 percent over the last three. By contrast, the SPDR S&P 500 ETF returned an annualized 10.6 percent over the last five years and 14.07 percent over the last three through the end of June.
Gold’s failure to rally in the face of global turbulence earlier this year wasn’t what some had predicted. “A lot of people expected gold to respond,” said Michael Bradshaw, a manager of the Wells Fargo Precious Metals mutual fund. Gold’s tepid response may be because other forces — notably the dollar — have weighed on prices. “There are so many other drivers these days,” said Georgette Boele, currency and special metals strategist with the Dutch bank ABN Amro.
Shanquan Li, manager of Invesco’s Oppenheimer Gold and Special Minerals mutual fund, estimates that geopolitical tensions affect no more than 30 percent of gold’s recent price moves, while the dollar has been dominant. A strong dollar tends to weaken interest in gold because both have served as havens in terms of stress, he said. “The dollar has been strong since 2014,” Ms. Boele said, which may be why gold was unable to mount a major advance, at least until now.
Ms. Boele forecasts gold prices of $1,500 an ounce by the end of next year. But she says gold could rise faster if central banks keep cutting interest rates. Lower rates might hurt the dollar and help gold, though expectations of some rate cuts by the Fed are already baked into gold valuations, she said.
Central bank rate-cutting aside, she said, gold would be helped by “a massive sell-off of the dollar,” perhaps caused by an equity market drop or rising concerns over debt, though she’s not predicting that either will happen.
Joseph Foster, manager of the Van Eck International Investors Gold Fund, pointed to rising United States government debt held by the public — which the nonpartisan Congressional Budget Office expects to increase by $12.7 trillion over the next decade from the current $15.8 trillion — as a possible cause of a future increase in the price of gold.
“In a weak economy, these debt problems become magnified and impact the financial system,” Mr. Foster said. “If we get economic weakness and start having debt problems in the United States, gold would become the ultimate safe haven.”
Central bank buying could help increase the price, he added. In 2018, the banks’ net purchases of gold were 651.5 tons, according to the World Gold Council. That’s the most since 1967, when net central bank buying came to 1,404 tons.
Bursts of demand can heavily influence prices because supply has been relatively stable. Additions to supply are hard to find and take long to develop, as with Detour Gold’s open pit mine in Northern Canada, which has been in development since 2012, according to a company spokesman. Continental Gold’s Buriticá project in Colombia should start commercial production next year after nine years of development, reported Paul Begin, Continental’s chief financial officer, but the overall pace of additions to gold supplies has been slow.
In recent years, exploration for gold has slowed, said Elizabeth Xie, co-manager of the American Century Global Gold fund. That’s at least partly because in gold’s last boom, from 2001 to 2011, many mergers and acquisitions were completed at “ridiculous premiums financed by huge debt,” Ms. Xie said. Paying down the debt has come at the cost of some funding for exploration, she said. “That’s been a factor in keeping the gold supply down.”
Ms. Xie spoke favorably of a recent joint venture agreement between Newmont Goldcorp and Barrick Gold. The two companies have combined their operations in Nevada, and savings on operations could amount to “a half-billion dollars per year over the next five years,” she said.
Gold prices would benefit from a sustained fall in stock prices of six months or more, said John Hathaway, co-portfolio manager of the Tocqueville Gold fund. “Then people would look for answers,” he said. “Gold gets the nod when people scratch their heads.”
“It’s been out of favor for so many years,” he added. “It’s really in the penalty box. All the negativity has been priced into gold.” Gold’s price will be constrained as long as stock prices rise, he added, declining to predict where gold might be in a year or two.
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