Photo Courtesy of Oriental Review
Investors are running out of reasons to own gold.
The price of the metal, which is often seen as a hedge against inflation and a weak dollar, has slumped to its lowest level in five years on Monday.
The dollar has rallied in recent months, diminishing the allure of holding gold. The U.S. economy has been on firmer footing, and tumult in China’s markets and Greece’s debt crisis have failed to restore gold’s appeal as a safe haven.
The price of gold had surged in the years immediately after the 2008 financial crisis, topping out at nearly $1,900 an ounce in August 2011, as investors anticipated that the Federal Reserve’s ultra-low interest rate policy and huge bond-buying program would undermine the dollar and lead to inflation.
That scenario didn’t pan out.
Instead, inflation has remained subdued and the economy maintained its recovery, albeit at an uneven pace. That has boosted demand for the dollar.
On Monday the price of gold sank another $25 to $1,106 an ounce, which is about 40% below its recent peak and the lowest price since March 2010.
“For past several weeks (gold) has been on the defensive because of the stronger dollar,” said Jim Steel, chief precious metals analyst at HSBC in New York.
When investors are worried about the outlook for the U.S. and the global economy, they tend to favor gold, Steel said. But when the U.S. stock and bond markets are strong, as they are now, investors don’t really see a reason to hold gold which, unlike stocks and bonds, doesn’t produce any income.
The dollar is strengthening as the Fed moves closer to raising interest rates for the first time in almost a decade. The prospect of rising interest rates and higher yielding U.S. assets has boosted the allure of the U.S. currency against other major currencies such as the euro and the Japanese yen.