May 10, 2017 7:00 pm JST

Gold prices drop as investors exit havens

All's well on US rate hike front, in French elections, on Korean Peninsula

Many people in rural India buy gold for weddings. © Reuters

TOKYO -- Gold prices are falling as investors leave havens and take on risks. They are betting that more interest rate hikes are on the way in the U.S. and that political risks hanging over Europe and North Korea are on the wane.

However, gold could show a steady tone if cheaper bullion spurs demand in India and China for making jewelry and other bling.

Gold futures in New York hovered around $1,225 per troy ounce on Tuesday during after-hours trading, Japan time. This is 5% lower than in mid-April, when prices reached a recent high, and the lowest level since mid-March.

The U.S. interest rate situation is partly responsible. The Federal Reserve on May 3 issued a statement saying it expects a recent economic slowdown to be temporary.

Before the announcement, the mainstream market view was that gross domestic product numbers for the January-March period and other weak economic data would force the Federal Open Market Committee to slow the pace of upcoming rate hikes.

On Friday, Fed's projection was backed up by U.S. employment statistics for April. More jobs were created than the market had expected, enough to make the unemployment rate dip.

News from Europe this week has also played a part in gold's fall. Pro-European Union candidate Emmanuel Macron handily won France's presidential election.

Another risk factor that had been pushing investors into gold also seems to be fading -- U.S. President Donald Trump is now dangling the possibility of direct dialogue with North Korean leader Kim Jong Un.

Market analyst Itsuo Toshima said that political emergencies previously helped steer investors to gold assets, which pushed up prices.

"But the peak has passed," he said.

Investor sentiment has significantly improved as well.

The CBOE Volatility Index, which measures market fears, on Monday dipped below 10, the lowest level in about 24 years. When investors have little to fear, they tend toward risk assets rather than havens like gold.

The gold futures market, which had led the price rise, has seen especially remarkable capital outflows of late.

According to the U.S. Commodity Futures Trading Commission, speculators on May 2 bought 189,634 transactions on a net basis (one transaction weighs 100 troy ounces), 11,000 transactions fewer than a week earlier.

Speculators, meanwhile, have started withdrawing capital from gold exchange-traded funds, securities designed to track the price of gold.

But hold the phone ... there are strong market views that the price decline will stabilize at a certain point.

History is a guide here. At the end of 2014, when gold prices sank to nearly $1,100 per troy ounce, wealthy Chinese ramped up their buying of physical bars.  

This helped to keep prices above the $1,000 mark.

A report published on Thursday by the research institute World Gold Council seems to signal that another buying spree could be near.

The report says global demand for physical gold in the January-March quarter, when prices remained high, was 20% lower than in the year-earlier period. This fall could be the result of buyers being turned off buy at high prices.

Koichiro Kamei, a financial and precious metals analyst, sees "many people who are willing to buy when prices get lower."

(Nikkei)

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