Investors ignoring classic bearish signals on gold

Published Fri, May 20 20164:50 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Gold doesn't always get along with a rising dollar or higher interest rates. Proof of that is its performance in the past week where gold futures lost about 1.6 percent in the second negative week in a row. But investors are still putting money into bullion even as these classic anti-gold trends pop up. Something bigger may be afoot. For the week ended May 18, gold ETFs received a third week of inflows, gaining another $631.6 million, which drove total assets to $51.8 billion, the highest level since March 2014. The SPDR Gold Trust ETF and iShares Gold Trust were both down a little more than 1.5 percent for the week. "You're getting the investment demand. That's why this rally is different. You're getting worldwide investment demand in gold," said Kevin Grady, president of Phoenix Futures and Options. Grady said the ETF asset growth is a very positive sign. "If you start to see outflows from the gold ETFs, that's when there's a shift in the dynamic of the picture for gold, but until there is, I'm staying on the bullish sentiment for gold." Grady said it may be that negative yields in other parts of the world are behind some of the flows. "It could be high net worth people in Europe ... or large hedge funds in Europe," he said. "I think it's smart money buying," he said. Some traders have pointed to other worries among gold buyers: Brexit (the U.K. vote on whether to leave the European Union on June 23), as well as the uncertainty around the U.S. presidential elections. There is also a concern among some market players that the Fed 's move to raise rates will actually refuel market chaos by driving the dollar higher and crushing commodities and emerging market currencies. That negative feedback could ultimately turn around to hit the dollar and help gold move higher. Read More Top stocks of the week and how to trade them "I think on the upside $1,308 should be a retracement," said Grady. "We need to get above $1,308 to $1,325. Something above there is going to attract more buying." Kitco said in a report that gold bulls technically have the near-term advantage, but are fading. They said the near-term price objective for a breakout is this week's high of $1,290.40 per ounce. As for the bears, the next price breakout objective would be closing below support at $1,225. BlackRock's Russ Koesterich says gold still has appeal despite the Fed's campaign to convince markets it will raise rates soon. "Whether the Fed goes in June or July, we think we're still in an environment where central bankers are looking to maintain a low-rate policy in the U.S.," said Koesterich, head of asset allocation for BlackRock's Global Allocation Fund. Koesterich said gold is key to hedging in a portfolio. "I think the environment is favorable for gold. Gold also plays that role of a hedge in the portfolio. Just to state the obvious, we're in the seventh year of a bull market," he said. "At some point, it's going to come to an end, and we think gold is an effective hedge." Read More These stocks will triple in next decade: CLSA The rising dollar is not necessarily going to be a negative for gold, which is up about 18 percent for the year, Koesterich said. "A year ago, we thought we'd be much further along in this hiking cycle," he said. "A year ago, the dollar was having a very strong rally. The dollar has picked up in recent days and recent weeks, but we're not appreciating at the same rate we were in 2014 or 2105. A year ago, we were still in a world where there wasn't much volatility. We've had two big spikes in volatility since then. I think that has reintroduced gold's value as a hedge. Gold is not just about inflation." In a report, Koesterich noted that in years when 10-year yields were above average, about 2.5 percent, gold rose by an average of 0.5 percent. But in years when rates were below historical averages, gold rose on average by a whopping 21 percent. The 10-year note was yielding 1.84 percent Friday. He also said the direction of inflation has mattered as well, and the best years historically were when real rates were low but inflation was rising. Since 1971, there have been 12 years like that and gold rose in 11 of them. The return was an average of more than 35 percent, according to Bloomberg data, Koesterich noted. "Given slow growth, a cautious Federal Reserve and the proliferation of negative sovereign yields in Japan and Europe, U.S. real rates are likely to remain low for the foreseeable future. At the same time, both core inflation and wages have been firming while the inflation drag from last year's strong dollar and collapse in oil is beginning to fade. This is exactly the type of environment that has historically been most favorable to gold," he wrote.

A saleswoman displays a gold bracelet at a jewelry shop in Lin'an, China.

China Daily | Getty Images

But investors are still putting money into bullion even as these classic anti-gold trends pop up. Something bigger may be afoot.