The gold-price rally since the start of the year, coupled with the recent pullback, is raising fresh debate over whether the precious metal has been over-bought in the stock market's latest risk-off mood.
As a classic safe-haven asset, it's not surprising that gold has rallied nearly 17% since the start of the year, at a time when the U.S. equity markets experienced extreme volatility that saw the S&P 500 Index fall by nearly 9%.
But since climbing to $1,263 an ounce last week, the price of gold has since dropped to less than $1,204, which is the kind of move that could leave some investors and financial advisers questioning their exposure to the asset.
Rob Haworth, senior investment strategist at U.S. Bank Wealth Management, attributed much of the gold rally to global concerns over a weakening Chinese economy, the trend toward negative interest rates by five separate central banks and Federal Reserve Chairwoman Janet Yellen's acknowledgement that negative rates could be a future tool in the U.S.
“All of that has led to a big push into gold,” Mr. Haworth said. “But, in our view, the economic story is better than what you've seen priced into stocks and gold lately.”
Describing at least some of the gold rally as “over-done,” Mr. Haworth believes investors might be overlooking the underlying strength of the U.S. economy.
The Fed, which in December introduced its first interest-rate hike in nearly a decade, had originally planned to hike rates four times in 2016. But a rocky start to the New Year for the equity markets has all but taken those earlier Fed targets off the table.
Mr. Haworth is still looking for two or three rate hikes this year, but nothing earlier than June, and most of those hikes coming “on the back end of the year.”
This kind of tempered bullishness is not lost on the kind of investors who tend to run toward gold when things look dicey.
The SPDR Gold Shares ETF (GLD), which tracks the price of gold bullion, is up 16.66% from the start of the year, kicking off what could be the ETF's first positive year since 2012.
In the mutual fund space, the gold story is even brighter, with funds in the equity precious metals category up an average of 26.98% from the start of the year, according to Morningstar.
“Given how much volume flooded into GLD last week, I would say the likely path for gold right now is down,” said Paul Schatz, president of Heritage Capital.
He added that the low point of $1,050 an ounce late last year was an atypical bottom, and the current pullback is being assisted by a strengthening dollar, which typically moves inverse to the price of gold.
“Seeing a $100 decline in the price of gold would not shock me,” said Mr. Schatz.
Maria Smirnova, a mining and precious metals portfolio manager at Sprott Asset Management, justified the rally since December as both a seasonal normality and partially fueled by global uncertainty.
“One of the things that triggered the gold rally is that people don't think the Fed will hike rates as much as they originally suggested they might,” Ms. Smirnova said. “The price of gold has broken out of a multi-year downward trend, which is very positive, but we would expect a very short-term pullback in the price.”
On a technical basis, Ms. Smirnova said the price of gold has support to keep the price from falling below the $1,185 range, and resistance on the upside from pushing the price above $1,320.