Gold Loses Luster on Economic Optimism, Anti-Pandemic Aid

Investor sentiments are growing bullish on the economic front following upbeat financial reports, stimulus efforts and the easing of lockdown restrictions. Notably, better-than-expected data on job losses and the services sector perked up markets, thereby boosting investor optimism on an economic rebound.

Hopes of an economic recovery whetted investors’ appetite to turn risk prone and thus be exposed to much more vulnerable bets such as stocks at the cost of a safe-haven asset like gold and bond.

Gold Prices Depreciate

Gold prices slid for the third straight week on Friday. Bullion dipped 1% this week, marking  its steepest fall since the week ending May 1.
Gold ETFs mostly move in tandem with gold prices. The SPDR Gold Shares (GLD)  has lost 3.3% in the past three weeks while , iShares Gold Trust (IAU),  is down 3.5% over the same time period.

Factors Cheering Investors

Investors overlooked the civil unrest that spread like wildfire across the country and rather chose to focus on the economic upturn.

Resilient global equity markets and positive economic information indicate that the worst will soon be over. Despite the unceasing U.S.-China tensions, and fears of a second wave of the coronavirus infection to hit the nation soon, investors seeking refuge in safe-haven assets can certainly see a halo of hope around stocks that are starting to display an upbeat momentum.

Additionally, the steady reopening of states and cities along with anticipations of an economic reboot in the second half of this year have been retaining investors’ faith.

Per a survey report, factory activity in China resumed growth in May as restrictions were relaxed. However, the improvement was marginal. Meanwhile, in the United States, manufacturing activity inched up from an 11-year low, suggesting that the severest phase in the coronavirus-led economic crisis can be overcome in the months ahead.

Joblessness to Decelerate

Data from Automatic Data Processing Inc., showed the private sector shed 2.76 million jobs in May. That was well below forecasts from economists surveyed by Econoday who expected a loss of 8.66 million. In April, the private sector shed 19.56 million jobs.

Due to imposition of lockdown measures to flatten the COVID-19 curve, most businesses were forced to either ramp down or close in the middle of March. With the gradual reopening of the economy, some businesses could restart activity only in mid-May, which is likely to temper the mounting unemployment rate.

ECB Rescue Package

Investors’ enthusiasm was buoyed by the European Central Bank (ECB) pandemic aid called Pandemic Emergency Purchase Program (PEPP) with an additional funding of $676 billion. This brings the total stimulus package to an astronomical figure of $1.52 trillion. The financial grant surpassed the market participants’ estimate of $563 billion.

According to ECB, the PEPP expansion will further ease the monetary policy, backing the business and household needs. The ECB also kept the key interest rate intact. Notably, the main refinancing operations stood at 0.00%, marginal lending at 0.25% and the deposit facility at -0.5%.
Analysts welcomed this move and the European markets also surged in response.

Conclusion

The coronavirus pandemic gave global markets the jitters including the United States. Concerns over the pandemic’s negative impact on the U.S. economy escalated investors’ anxieties earlier and had caused shift to  safe haven asset like gold. However, with the Fed’s efforts to cushion the economy, expectations of a quick economic retrieval renewed investors’ confidence, thereby eliminating the lure of gold.

However, the loss of shine on gold will remain capped due to Sino-US strained relations. Also, lower interest rates induce lesser opportunity cost of holding non-yielding bullion that makes gold an attractive option for investors hoarding other currencies.

We  remain watchful of some of these stocks in the Zacks mining - gold industry, such as Harmony Gold Mining Company HMY, Kirkland Lake Gold Ltd. KL, New Gold Inc. NGD and Sandstrom Gold Ltd. SAND, each currently carrying a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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