Gold Breaks Below $4,000 as Multi-Year Rally Grinds to a Halt

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(Bloomberg) — Gold fell below $4,000 an ounce for the first time since November, as a resurgent dollar and the prospect of higher interest rates bring bullion’s three-year bull market to a halt.

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Prices slipped as much as 2.9% to $3,999.90 an ounce, retreating for a second session. The precious metal has posted double-digit gains for each of the last three years, more than doubling in price as central banks, money managers and retail investors all piled into the trade.

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That rally ran out of steam in late January, shortly after the precious metal hit an all-time-high near $5,600 an ounce. By June, it had fallen more than 20% below its last peak, the threshold that conventionally marks the start of a bear market.

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Chief among the factors that weighed on bullion’s performance was the outbreak of the US-Iran war. Higher energy prices have fueled inflation and increased the likelihood of rate hikes, making bullion less attractive relative to yield-bearing assets like Treasuries.

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Although oil prices are now falling as the US and Iran are negotiate a permanent peace deal, new Federal Reserve Chair Kevin Warsh surprised markets with a hawkish tone at his first rate-setting meeting last week, putting more downward pressure on the metal. 

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“The primary driver behind gold’s recent decline has been a significant repricing of interest-rate expectations,” Ewa Manthey, commodities strategist at ING Groep NV wrote in a note Wednesday.

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Warsh’s hawkish messaging will likely limit concerns about central bank independence in developed economies, analysts at Goldman Sachs Group Inc said. Those concerns had previously fueled bets on precious metals as part of the “debasement trade” — broadly defined as a strategy favoring assets such as gold and Bitcoin over currencies vulnerable to inflationary, fiscal and monetary excess like the dollar depreciation.

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Several major banks have cut their gold forecasts in the last week. Though revised targets imply prices will gain from current levels, Wall Street analysts are markedly less bullish than before. Goldman Sachs Group Inc. axed $500 from a forecast that now sees bullion ending the year at $4,900 an ounce, while Deutsche Bank AG cut its fourth-quarter estimate by 17%.

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Continued sales from gold-backed exchange-traded funds showed that the usual support for the metal is “notably absent,” Deutsche Bank wrote in a note. Meanwhile in China, the metal’s onshore discount to Comex prices in New York suggests imports will not be a support for the market, the bank’s analysts said.

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Still, one bright spot for bullion is the continued strength of central-bank demand. The monetary institutions added to their holdings at the fastest pace in more than a year in the first quarter, and survey data indicates they intend to buy more. 

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“The one pillar which remains strong is central bank demand, and we expect this to be the case for some time to come,” Deutsche Bank wrote.

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