Why some investors have taken a shine to gold
A poll of investment banks conducted late last year by The Wall Street Journal predicted that the price of gold would "hover around" $1,100 per troy ounce in 2016. They felt the outlook for the precious metal wasn't so shiny given that U.S. interest rates were expected to rise several times this year. When borrowing costs rise, gold loses its allure because it doesn't offer a yield to investors like bonds and dividend-paying stocks do.
However, the economy's unexpectedly weak performance amid slack global growth stalled the Federal Reserve's rate hike plans -- and helped fuel a resurgence in the gold market that caught many observers by surprise.
Indeed, futures prices for June delivery changed hands Tuesday at $1,276, after earlier reaching a high of $1,281. And RBC Capital Markets recently predicted prices could hit $1,400 within the next few months.
Adding to the momentum comes word that several high-profile investors have also caught gold fever amid improving market sentiment. Billionaire George Soros made two huge bets on the shiny metal during the first quarter of 2016. According to filings with the Securities & Exchange Commission, he acquired a $264 million position in mining company Barrick Gold (ABX) along with a call option valued at $123 million in the SPDR Gold Trust (GLD), an exchange-traded fund that's a proxy for the gold market (call options give Soros the right to purchase the underlying security at certain date and price).
Shares of Toronto-based Barrick, the largest gold miner, closed on Tuesday up 2.4 percent to $19.36 and have surged more than 162 percent this year.
Stan Druckenmiller, a billionaire who was Soros's chief investment strategist, is also bullish on gold as is Dennis Gartman, a closely followed commodities investor.
ICBC Standard Bank, a Chinese-state owned company, recently announced plans to acquire Barclay's (BCS) precious metal storage business, which will boost China's presence in the gold market. The deal includes a facility in London that can store as much as $90 billion worth of gold.
Of course, not all investors are so optimistic on gold. Billionaire John Paulson's Paulson & Co. hedge fund sold off some of its position in the SPDR Gold Trust, although that might have been to take some profits given the fund has gained more than 20 percent this year. SPDR Gold Trust also has held shares in several mining companies.
"The negative sentiment that we saw last year and going into the new year was mainly due to the thought that the U.S. central bank was setting out on an interest rate increase path and that interest rates here in the U.S. would continue to rise," said Chris Gaffney, a senior market strategist at EverBank Wealth Management.
"Obviously, the economy didn't do as well as the Fed would like to see," Gaffney added. "At the same time, we saw some major central banks, in particular, the Bank of Japan and the ECB [European Central Bank] go negative with interest rates."
In fact, the U.S. economy grew at anemic 0.5 percent in the first quarter, prompting many to wonder if the Federal Reserve will raise interest rates as some had expected at its next meeting in June. The dollar has also declined in value compared to foreign currencies, which further fueled gold's gains.
Investors have turned to gold during uncertain times for centuries, and they certainly have plenty to worry about these days, from the U.S. presidential election to the slowdown in China's economy.
"There are real questions in the markets now," Gaffney said. "In the long run, rates in the U.S. and global rates are going to stay lower longer, and that should be supportive of precious metals."