Gold prices suffered the biggest monthly drop in four and a half years in June after the Federal Reserve surprised investors with its willingness to control inflationary pressures with an eventual rise in interest rates, denting the appeal of holding the metal.
Gold fell 7 per cent in June to $1,779 an ounce. That still left the price within its range for the year so far, but was its worst monthly drop since November 2016. Shares in gold miners have also sunk 16 per cent this month, according to the NYSE Arca Gold Bugs index.
Gold has struggled against a stronger dollar and rising bond yields following remarks from Fed officials last month that indicated an increased likelihood of interest rate rises in 2023. Gold suffers when bond yields rise, because the metal provides no yield to investors.
Higher inflation may push the Fed to raise interest rates at least twice by the end of 2023, according to a new poll of leading academic economists for the Financial Times.
“There is not a huge amount of demand for [gold] right now,” Suzanne Hutchins, a fund manager at Newton Investment Management, said. “Gold is a great barbell: it’s OK if inflation is really high and it’s OK if you get a lot of deflation, but we are in this mid zone.”
Hutchins said her fund had reduced its holdings in gold and gold equities from 18 per cent last year to about 6 per cent.
Gold prices surged to a record high of more than $2,000 an ounce in August 2020 on concerns about the impact of Covid-19 on the global economy. But since vaccines have been rolled out in the US and Europe, gold has suffered as investors have grown more optimistic about the economic recovery.
Analysts at Citi said they expected gold prices to continue to decline over the summer, but not to crash. They forecast prices of $1,760 an ounce next year.
Still, holdings in gold-backed exchange traded funds have only seen small outflows of about 8 tonnes, or 0.2 per cent of the total assets in gold ETFs, in the week ending June 25, according to data from the World Gold Council.
Economists are divided over how pronounced and prolonged inflation will prove to be, and when central banks will respond by raising interest rates. Some gold enthusiasts, however, believe inflation could spiral out of control and boost the price of the precious metal, which is often considered an inflation hedge
Alasdair McKinnon, manager of the Scottish Investment Trust, said he doubted the Fed and other central banks could control rising inflation pressures in everything from house prices to second-hand cars.
“We’re looking at a 1970s period of inflation and a 1970s period of outperformance of gold versus everything else,” he said. “It seems to be the one undervalued asset class.”