May 20, 2017 6:12 am JST

Gold's rise cools quickly on market optimism, risk tolerance

Promising indicators, hopes for key rate hikes counter Trump-Russia furor

RURIKA IMAHASHI, Nikkei staff writer

Gold has a history of being bought up in tense times.

TOKYO -- Gold's fear-based surge is losing momentum, as rebounding optimism for U.S. interest rate hikes and economic health overcome the political storm in Washington, while the market appears to be getting used to ongoing risk.

The precious metal's price spiked this week amid news of questionable behavior by U.S. President Donald Trump. Reports that Trump asked former FBI director James Comey -- whom he later fired -- to drop a probe into former national security adviser Michael Flynn's ties to Russia, and that the president leaked top-secret intelligence to Moscow, have sparked a frenzy. Some have even floated the possibility of impeachment.

The VIX Index, a measure of the implied volatility of U.S. stocks that gauges investors' fears, jumped to 15.59 earlier this week after long holding steady in the 10-point range. The market swerved into risk-off mode, and concerns over the protracted wait facing key administration policies such as tax reform and infrastructure spending sent equities and the dollar sliding further.

As a result, gold -- which is often treated as a safe haven in times of stress -- saw its price soar by around $30, or 2%, over Wednesday and Thursday, at one point touching the range of $1,265 per troy ounce. Speculators who had been paring back their net purchasing of the precious metal suddenly began to buy it back.

But the gold rush quickly waned, and Friday found futures prices settling back to around $1,250 per troy ounce in the New York market, down about 1.2% on the day.

One source of relief was a healthy manufacturing activity index released Thursday by the Federal Reserve Bank of Philadelphia. The index grew for the first time in three months, soundly beating market predictions with a reading of 38.8. The U.S. Department of Labor also published numbers showing new unemployment insurance requests fell to a roughly three-month low, confirming that the economy is holding firm.

The speed with which gold corrected its sudden rise also "speaks volumes about how strong the downward pressure is" from renewed optimism for interest rate hikes, says market analyst Itsuo Toshima.

Some sources of risk still smolder. Iran is holding the first round of voting in its presidential election Friday, with an anti-U.S. hard-liner gaining steam. Just Wednesday, the Trump administration imposed new sanctions related to Iran's ballistic missile program, and the impact this will have on swing votes is not yet clear. Washington also may very well face a long investigation into the administration's ties with Russia.

With uncertainty still bubbling around the world, gold "is unlikely to be sold off," observes a senior economist at Nomura Securities. But some say Janet Yellen -- who chairs the U.S. Federal Reserve, which is responsible for raising key interest rates -- "likely wants to lay a path to normalize monetary policy in the remainder of her term ending February," according to Koichiro Kamei, a financial and precious-metals analyst. This suggests gold's price increases would be limited even if it were heavily bought up.

The market has weathered geopolitical jitters all year, including North Korean tensions and far-righter Marine Le Pen's momentum -- though eventual loss -- in France's presidential election. Players may have grown somewhat accustomed to anxiety, making it hard for gold to sustain a price rise even amid Trump's treadmill of Russia scandals. Barring a shock so great as to counter the downward pressure from expectations for interest-rate hikes, gold will have trouble breaking through the $1,290-per-troy-ounce range seen in mid-April. 

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