Gold dips, dampening 'safe haven' from stocks

Investors who sought refuge from equities by buying gold were likely disappointed Friday, when prices of the precious metal plummeted along with the stock market.

Gold futures fell by nearly 4% during the day, ending what had otherwise been a strong week. Behind that drop was a push for liquidity that caused some gold investors to offload their holdings, analysts said. That was exacerbated by massive bets made early in the week by futures traders who bought up gold only to find that the strategy would not have a quick payoff, according to a post on the Kitco gold-trading site by senior market analyst Jim Wyckoff.

“Futures trading is highly leveraged. That can be both good and bad for a speculative trader,” Mr. Wyckoff wrote. “When the futures market’s price goes the trader’s way, he or she can make a lot of money in a hurry. However, when a futures market turns against a trader, the consequences can be devastating.”

Another, more obvious, factor is that prices follow consumer demand – and with the impact that coronavirus is having on China’s economy, one of the world’s biggest buyers is likely pulling back, Mr. Wyckoff wrote.

Investments in gold can help improve a portfolio’s risk-adjusted returns, with allocations from 2% to 10% being helpful for many investors, said George Milling-Stanley, chief gold strategist at State Street Global Advisors, in an interview Thursday. A report published last year by gold-ETF provider GraniteShares even found that a 35% allocation to gold had the optimal impact on risk-adjusted returns. That company, along with most advisers, does not necessarily recommend such high allocations for most investors.

Mr. Milling-Stanley has pegged gold prices to reach $1,700 per ounce this year, a figure that he said was conservative. Spot gold reached nearly $1,650 by midday on Thursday, but prices have since fallen. That category was down by about 3.5% by Friday afternoon, with prices hovering around $1,580 per ounce, according to figures from Gold Price.

But the price drop should not discourage investors from turning to gold as a “safe haven,” at least not yet, said Kris Inton, director of basic materials equity research at Morningstar.

“It seems like people are just selling for liquidity purposes,” Mr. Inton said. “In terms of the actual investment case for gold – which is what drove the sharp rise of the past couple of weeks, that hasn’t changed … If anything, it’s getting stronger.”

That is due to the potential further impacts the coronavirus would have on the stock market, working in gold’s favor, he said. However, that same issue, along with the possibility that the Federal Reserve could raise rates later this year means there’s "a big uncertainty right in front of us” that could lead to lower price expectations in the coming months.

Morningstar has an average price forecast of $1,500 per ounce for gold, “which is meaningfully lower than it is today, but still higher than it was last year,” he said.