The combination of fast-rising interest rates and low inflation expectations has sent gold on an epic slide that doesn't look likely to end anytime soon.
Gold was trading at $1,230 an ounce Wednesday, down 3.5% for the day and down more than 20% from the beginning of April.
The precious metal has come under extreme pressure, thanks to the violent upward move in interest rates the past two months. With the 10-year Treasury now yielding around 2.6%, up nearly 100 basis points from May 1, investors are being treated to a return above expected inflation for the first time in a long time. And that's bad for gold.
“If you have a negative real rate environment it's the perfect environment for gold,” said Russ Koesterich, global chief investment strategist at
BlackRock Inc. “That's been the last five years. Rising real rates are tougher for gold.”
Investors have responded to the worsening outlook for gold by heading for the hills. More than $18 billion has been redeemed from the $39.85 billion SPDR Gold Shares ETF (GLD) this year, with $1.3 billion pulled in the last five days alone.
Four out of five institutions said they would reduce their gold holdings this year, according to a recent survey by Natixis Global Asset Management SA.
“In times of uncertainty, it's supposed to be a store of value, but this time it's not,” said Lewis J. Altfest, chief investment officer of Altfest Personal Wealth Management. “If I thought inflation was going to come roaring back, I'd put 5% to 10% in gold. But it's too early to say that.”
Even though the short-term outlook for gold is dim, the long-term case for it still is intact, said Will Rhind, managing director at ETF Securities LLC. “There's still a very large debt situation with no credible solution,” he said. “Until the countries put in place credible policies to [reduce] debt burdens, we will look to gold as a currency hedge against that risk.”
Mr. Koesterich agrees that it's still prudent to keep some gold in a portfolio, albeit maybe not as much as in the past.
“We think it's a strategic asset class,” he said. “It serves a purpose in a portfolio. Whatever you owned before, now own a bit less.”
