- Gold edged lower on higher U.S. Treasury yields in mid-February, with sentiment mixed over the near-term outlook for bullion prices.
- Gold, which bears no yield, was down 0.26 percent to $1,819.90 per ounce on February 15, after U.S. Treasury yields surged to a near 11-month high on February 12.
- Gold was losing its “safe haven” appeal, with many analysts betting on accelerating economic recovery from the grip of the pandemic.
Some analysts believe that gold prices will rise due to prospects for a $1.9 trillion U.S. stimulus package, and possibly a softening dollar, which could stoke inflationary expectations. Gold is seen as a hedge against rising prices.
Any delays or roadblocks to the stimulus package could weigh on the gold price.
Other analysts feel that a successful vaccinations rollout could encourage hopes for economic recovery and drive up interest in equities rather than safe haven precious metals gold and silver.
Furthermore, rising interest in investing in bitcoin as an alternative safe haven to gold or the dollar, may drag on gold prices going forward.
Tesla’s announcement of its huge investment in bitcoin has contributed to drive up investor buying of the cryptocurrency, which has hit record highs.
For UK gold savers, the recent strengthening of the pound against the dollar, at a time when gold prices appear to have
lost upwards momentum, can be a good opportunity to buy more bullion.
The longer term outlook for gold prices remains constructive as U.S. interest rates are likely to remain at very low levels for a prolonged period due to the need to stimulate the economy and rescue the livelihoods of those hardest hit by the pandemic.
A climate of rock bottom interest rates is a bullish signal for non-interest-bearing gold as it makes yield-bearing assets relatively less attractive to investors.
The pound, which has strengthened since the start of 2021 buoyed by the UK’s success in rolling out vaccinations against COVID-19, as well as a last-minute Brexit trade deal agreed with the EU at the end of 2020, could gain more ground against the dollar if the UK continues to meet its deadlines for the vaccines distribution, paving the way for a rapid economic recovery.
By mid-February more than 15 million people in the UK had received their first vaccine dose.
Sterling, which hit a three-year peak against the dollar in the second week of February, gained support from better-than-expected UK fourth quarter 2020 GDP data.
While the UK economy shrank by 9.9 percent in 2020, the biggest annual fall in output in more than 300 years, it avoided heading back to recession in the fourth quarter and appears set for a recovery in 2021.
Frequently asked questions
Why did the price of gold experience a dip in mid-February?
Gold prices edged lower in mid-February due to a surge in U.S. Treasury yields, which reached a near 11-month high on 12 February. Because gold does not bear any yield, higher Treasury yields make yield-bearing assets more attractive to investors, which in turn reduces the demand for precious metals.
Additionally, gold has started losing its traditional appeal as a safe haven asset. Many market analysts are now betting on an accelerating global economic recovery from the impact of the pandemic. This growing optimism, combined with rising interest in alternative assets like bitcoin and equities, has shifted investor focus away from gold, causing the price to slip down to $1,819.90 per ounce by 15 February.
What factors could cause gold prices to rise in the future?
Gold prices could rise due to several key factors, including the prospects of a massive $1.9 trillion U.S. economic stimulus package and a potentially softening dollar. These economic measures are expected to stoke inflationary expectations, and because gold is traditionally viewed as a reliable hedge against rising prices, this could drive up demand for the metal.
Furthermore, the long-term outlook remains constructive because U.S. interest rates are projected to stay at rock-bottom levels for a prolonged period. This low-rate environment is highly supportive of non-interest-bearing assets like gold, as it significantly reduces the opportunity cost of holding precious metals compared to yield-bearing investments that offer minimal returns during economic recovery efforts.
How is bitcoin affecting the market demand for gold?
Bitcoin is increasingly being viewed by some investors as an alternative safe haven to both gold and the U.S. dollar, which is dragging on gold prices. This shift in sentiment has been fueled by major institutional moves, such as Tesla announcing a massive investment in the cryptocurrency, which triggered record highs in its valuation.
As investor buying of digital currency intensifies, it diverts capital that might have otherwise gone into traditional physical assets. This growing competition from the cryptocurrency market, combined with rising optimism surrounding vaccination rollouts and equities, has weakened the near-term momentum of precious metals like gold and silver, leaving market sentiment highly mixed over their future outlook.
Is now a good time for UK buyers to purchase gold?
Yes, the current market conditions present a potentially excellent opportunity for UK savers to purchase more gold bullion. This is because the British pound has recently strengthened against the U.S. dollar at the same time that global gold prices have lost some of their upward momentum.
Because international gold is priced in U.S. dollars, a stronger pound gives UK buyers increased purchasing power. The rise in sterling’s value has been driven by the UK’s successful vaccination rollout, alongside the resolution of Brexit trade negotiations. With gold prices temporarily dipping and the pound remaining strong, domestic buyers can acquire more bullion for their money than was possible in previous months.
Why has the British pound been strengthening against the dollar?
The British pound has strengthened against the dollar due to the UK’s highly successful rollout of COVID-19 vaccinations and the resolution of Brexit uncertainty. By mid-February, more than 15 million people in the UK had received their first vaccine dose, paving the way for a faster economic reopening and recovery.
Additionally, the last-minute Brexit trade agreement with the EU at the end of 2020 removed a major source of market anxiety. Sterling also received a boost from better-than-expected fourth-quarter GDP data for 2020. Although the economy shrank by 9.9 percent over the course of the year, it successfully avoided returning to a technical recession in the final quarter, boosting investor confidence.
