Strong US recovery drags on gold; lower energy prices a ‘game-changer’ – RedKite

Otmane El Rhazi from The Bullion Desk.

Gold’s near-term attractiveness as an asset could continue to diminish as the US economic recovery gains steam, the dollar strengthens and lower energy prices spur consumer spending, Michael Sheehan, Redkite Capital Management portfolio manager, said at the LBMA Precious Metals Conference here.

Gold futures for December delivery on the Comex division of the New York Mercantile Exchange have fallen to $1,160 per ounce, nearly $130 below their year’s February high. This downward trend has been attributed to dollar appreciation and a rotation into risker assets, such as equities, among other factors.

“I’m very bullish on the dollar and what’s happening in the United States in general. And this has changed my view on the gold market,” said Sheehan, who turned more bearish on gold over the past several months.

The collapse in oil and gasoline prices, while having a major positive impact on the broader US economy, have helped to push gold lower, Sheehan said.

Since the beginning of July, US gasoline prices have fallen by about 70 cents per gallon nationwide. In absolute dollar terms, that equates to $300 million per day less that the US consumers are spending, Sheehan noted.

“This is a game-changer. It’s bigger than any QE programme that the Fed could dream up. Make no mistake, this is a direct tax cut to the consumer,” Sheehan said.

And by most measures, US consumers and businesses are leading the global recovery. America is on pace for its best labor market performance in the past 15 years. After 214,000 jobs were added in October, the unemployment rate fell to 5.8 percent, the lowest level in six years.

Meanwhile, the S&P 500 and Dow Jones Industrial Average both reached new record highs on Monday, while the CBOE Vix index, which measure volatility, dipped to a two-month low.

So its not surprising that the dollar has strengthening materially. Last week, the British pound fell to a 14-month low and the euro to two-year low against the greenback..

“At the end of the day, the US is doing well, therefore the need to hold gold in portfolios is becoming less important. That’s what’s driving the [gold] market lower today,” he concluded.

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