The Price of Gold is Sinking. What’s Driving the Sell-Off?

Gold prices tumbled to a two-month low after Federal Reserve Chair Powell voiced concerns about inflation.

A test of the Federal Reserve’s mettle is weighing on precious metals.

Fed Chair Jerome Powell, speaking yesterday after the central bank decided to leave interest rates unchanged, expressed concern about the impact of rising oil prices on inflation, and said that the possibility of a rate hike has come up in policy committee discussions. The whiff of hawkish energy from the Fed cast a pall over markets, sending stocks lower, bond yields higher and precious metal prices into the dumps. (Read Investopedia’s coverage of today’s market action here.)

Spot gold prices were down about 4% at $4,650 an ounce recently, after falling as much 7% earlier in the day. The precious metal has lost 11% of its value since the Iran war began in late February. Mining stocks including Newmont (NEM) and Freeport McMoRan (FCX) were among the biggest decliners in the S&P 500 on Thursday, while the Van Eck Gold Miners ETF (GDX) dropped 7%.

A Fed decision to raise interest rates, which seemed unthinkable until recently, would make yielding assets such as bonds look relatively more appealing, explaining the decline in metals lately.

Important

Gold might have backed off from record levels, but some market experts say that the outlook for the precious metal remains favorable. The price of gold is still up 60% over the past 12 months, and remains well above its 200-day moving average.

Profit-taking after gold soared to a series of record highs over the past year could also be at play, according to Ed Yardeni of Yardeni Research.1 “Perhaps investors in the Middle East are selling gold to buy the U.S. dollar, which has strengthened during the war, even though both are considered safe havens,” Yardeni said in a report published Thursday afternoon. He also said rising bond yields could also be contributing to gold’s “meltdown.”

Retail investors are “starting to give up on gold” according to Vanda Research. Some $2.8 million flowed out of SPDR Gold Trust (GLD), a popular fund that tracks the price of the precious metal, in the first two hours of trading—at that pace, Thursday could be the biggest day of net selling in the fund since February 26, data compiled by Vanda show.

However, at least one investment strategist remains bullish on gold, and reminded investors—many of whom expressed concern about it during a global asset allocation webinar today—that various signals still tilted in favor of it.

Concerns about gold’s outlook were hard to miss during Ned Davis Research’s webinar on Thursday—Investopedia’s queries about the outlook for the precious metal were preempted by at least a handful of other investors who wrote in similar questions. The firm’s chief global investment strategist Tim Hayes, in response, said the firm’s models were still flashing in favor of gold, and that “macro factors haven’t turned negative.” He also said “the thing to watch” to get an early sense of gold’s prospects turning negative, is if it fell below its 200-day moving average of around $4,100.

Sentiment signals are flashing for it too. “Gold pessimism has increased quite a bit,” Hayes said. “From a contrarian standpoint that is a bullish sign.”