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Gold Is Gleaming Again

27 June 2014 in Trading Ideas

Investing in gold has seemed out of favor for so long now that it’s rarely taken seriously, but few may realize that the yellow metal, as well as gold stocks and ETF, are putting up strong returns so far in 2014.

Earlier this week, gold extended its two-month high, as sustained worries about instability in the Middle East and dovish remarks from England’s central bank again prompted investors to buy the metal, according to the Wall Street Journal.1

Gold itself settled at $1,321 an ounce on Tuesday, its highest closing price since April 14.

 

As the Journal reported, gold futures have moved higher in recent weeks, as a violent conflict in Iraq spurred demand for the precious metal. Some investors view gold as a safer bet than Treasury bonds and other assets during periods of geopolitical unrest.

Other gold-related investments followed suit. The Precious Metals motif, for example, has gained 11.9% in the past month. In that same period, the S&P 500 is up 2.2%.

In 2014, the motif has risen 9.9%; the S&P 500 has increased 7.5%.

This past week also saw particular sparks for gold’s rally. On Tuesday, al Qaeda-linked Islamist militants took complete control of Iraq’s largest oil refinery, hampering the Iraqi government’s efforts to protect infrastructure crucial to its economy.

As Charles Nedoss, a senior market strategist with LaSalle Futures told the Journal, “The world’s gotten a lot scarier lately.”

Less scary but perhaps just as impactful, Bank of England Governor Mark Carney said this week that the UK’s first interest rate hike since 2009 would depend on the economy, which some took as a signal that rates could remain at record lows for a while longer. Carney said that subdued wage growth in the country points to spare capacity in the economy that should be used up before tightening monetary policy.

That more “dovish” stance put a shine on gold’s allure as a value investment. As the Journal notes, some investors will buy gold to hedge against the impact of accommodative monetary policy and as a currency alternative, because the metals’ value isn’t linked to a particular government or country.

Still, not everybody believes the rally will continue much longer. Barclays said that current price levels presented a selling opportunity, with other analysts suggesting the rally won’t continue because of its more temporary causes: massive short-positioning, tensions in Iraq and the Fed brushing off signs of inflation.2

However, as the Journal pointed out, many of these same analysts didn’t see gold’s rally coming in the first place.

1Tatyana Shumsky, “Gold Prices Extend Two-Month Highs,” wsj.com, June 24, 2014.

2Ira Iosebashvili and Tatyana Shumsky, “Few Predicted Gold’s Rally, Few Believe It’ll Last,” wsj.com, June 20, 2014.

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