Gold's demise may be golden for US stocks

Gold tumbled to a fresh a yearly low on Thursday, a sign investors are not worried at all about inflation rising too far, too fast anytime soon. It may also be a buy signal for U.S. stocks.

“Why buy gold when U.S. stocks are so good?” said Phil Flynn, senior energy analyst at The PRICE Futures Group and a FOX Business contributor. 

The recent drop in gold coincides with the Dow Jones Industrial Average reclaiming 25,000 last Friday and the Nasdaq hitting a fresh record on Tuesday.

“The Nasdaq’s hitting new highs and with yields rising for fixed income, gold is not looking very attractive. Plus with the rising rate environment it makes the dollar stronger, which is not good for gold,” Flynn added.

The greenback is trading at a 52-week high against a basket of U.S. trading partners this year, a sign investors are becoming more confident in the American economy which is now expected to grow 4.5% in the second quarter, according to the Federal Reserve Bank of Atlanta’s GDP Now tracker, which tabulates real-time economic stats. That has pushed gold down sharply in recent days, hitting a new yearly low.

Source:iGolder.com

In its mid-year outlook published Thursday, the World Gold Council acknowledges gold investors saw their “fortunes change” in recent weeks, after a strong first quarter. Still, their experts are optimistic gold prices will find a floor, partly due to the U.S. dollar. “In addition, in the face of ongoing rhetoric over trade agreements, the market seems to have taken the view that the US will likely benefit from renegotiations. Even if this turns out to be the case, many economists believe that an increase in tariffs will eventually have a negative impact on economic growth. And while this could decelerate gold consumer demand somewhat, its effect may be lessened by a weakening in the US dollar” the outlook notes.

Plus, hotter inflation is becoming less of a concern for U.S. policymakers.  “Looking ahead, my colleagues on the FOMC and I expect that, with appropriate monetary policy, the job market will remain strong and inflation will stay near 2% over the next several years,” said Federal Reserve Chairman Jerome Powell in prepared congressional testimony on the central bank’s semi-annual Monetary Policy Report on the U.S. economy Tuesday. Powell is on Capitol Hill Wednesday for round two of testimony.

The SPDR GLD Exchange Traded Fund, the largest gold-back ETF, has lost nearly 6% this year.

Even as the shiny metal loses its luster, global fund managers are keeping an eye on what may be a good entry point for gold bugs who see long-term value in owning the metal regardless of marcoeconomic trends.

A record net 17% of global fund managers think gold is undervalued, according to BofA Merrill Lynch Global Research note published this week.