News / Economy

Fading Volatility Promises Long Period of Gold Stagnation

FILE - Gold bars and U.S. dollar bills.
FILE - Gold bars and U.S. dollar bills.
Reuters

Ultra-calm trading conditions in gold are becoming self-perpetuating as a persistent lack of volatility frustrates investors seeking a return, pushing them further away from a market that analysts say could be becalmed for years.

Gold, which saw a dramatic reversal last year after a 12-year bull run took prices to record highs in 2011, has seen the spread between its daily price highs and lows narrow to just $15 an ounce this year on average, from nearly $25 in 2013.

Implied volatility, an estimation of an asset's future volatility, has dropped in gold to around 12 percent this month from an average of 19 percent in August last year, and from highs of nearly 60 percent in mid-2008.

With the dollar strengthening, equities showing a better return, and signs of inflation still notably absent from most developed economies, the metal has run out of reasons to rise.

“We are pretty unexcited by the outlook of gold,” Charles Morris, head of absolute return at HSBC Global Asset Management, said. “It could stay in this range for another five years.

“If inflation is under control for a long period of time, then gold will be under control for a long period of time, and because you don't get a yield, it is a waste of money to have a large position in gold.”

Gold is not the only market to be losing momentum. Volatility in the global foreign exchange market approached historic lows in July, while average daily volumes dropped by almost 14 percent, data from FX settlement system CLS showed.

“What the central banks have done to provide liquidity has pushed down volatility in the commodity market, and interest rates market, and indeed equities,” Credit Suisse analyst Tom Kendall said. “They all feed through to every part of the traded economy, so it is a problem for FX traders, it is a problem for interest rates traders, it's a problem across everything.”

As an asset in its own right, gold does not lack price drivers at the moment. The problem is, they are working against each other.

Federal Reserve policy is slowly normalizing after years of ultra-loose conditions, which had fed into rising gold prices. The U.S. central bank has signaled that it is ready to start thinking about raising interest rates, probably next year.

That should be pushing prices lower, as should a rise in the dollar index this year. But working against that is uncertainty over the long-term inflationary effects of the monetary stimulus measures that followed the 2008 financial crisis.

Gold has also taken support from outbreaks of violence in Ukraine and the Middle East, which some fear may destabilize a fledgling recovery in the European Union and push up oil prices.

The fact that this unrest has not done more to push prices is adding to investors' caution over gold.

“There has been very little and short-lived correlation between the Middle East problems, Russia and Ukraine with gold itself,” Adam Laird, investment manager at Hargreaves Lansdown, said. “There is a lot of concern among smaller investors that the market has not been able to react to wider political events.”

Store of value

Not all buyers are seeking price volatility. Those who buy metal as a store of value, for instance, prefer a stable market. This has particularly been true in India, historically the world's biggest gold consumer, where buying dried up during the violent price moves that followed the collapse of Lehman Brothers.

But supply to Indian consumers has been constrained by restrictions on gold imports as the government tries to get its current account deficit under control, meaning its response to a more appealing price environment has been limited.

Meanwhile buyers in China, which has recently overtaken India as the world's number one gold consumer, appear much less happy with price stability.

Consumer demand is not in any event going to lead to a repeat of gold's scorching price rise of the last decade. The doubling in gold prices in the three years to September 2011 was overwhelmingly due to investment flows, as funds piled into the metal as a haven from financial market risk.

What would turn gold around would be a significant rise in inflation, which few economists see happening any time soon. Until another clear driver emerges, investors prefer to stay on the sidelines.

“Essentially, you have plenty of supply, [and] demand is likely to fall because of low volatility, rising interest rates and a strong dollar,” HSBC's Morris said. “You put all this together and you think: 'why are people going to come running'?”  

You May Like

Video One Year After Thai Coup, No End in Sight for Military Rule

Since carrying out the May 22, 2014 coup, the general has retired from the military but is still firmly in charge More

Goodbye, New York

This is what the fastest-growing big cities in America have in common More

Job-Seeking Bangladeshis Risk Lives to Find Work

The number of Bangladeshi migrants on smugglers’ boats bound for Southeast Asian countries has soared in the past two years More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Turkey's Main Opposition Party Hopes for Election Breakthroughi
X
May 22, 2015 10:23 AM
Turkey’s main opposition Republican People’s Party has sought an image change ahead of the June 7 general election. The move comes after suffering successive defeats at the hands of the Islamist-rooted AK Party, which has portrayed it as hostile to religion. Dorian Jones reports from the western city of Izmir.
Video

Video Turkey's Main Opposition Party Hopes for Election Breakthrough

Turkey’s main opposition Republican People’s Party has sought an image change ahead of the June 7 general election. The move comes after suffering successive defeats at the hands of the Islamist-rooted AK Party, which has portrayed it as hostile to religion. Dorian Jones reports from the western city of Izmir.
Video

Video Europe Follows US Lead in Tackling ‘Conflict Minerals’

Metals mined from conflict zones in places like the Democratic Republic of Congo are often sold by warlords to buy weapons. This week European lawmakers voted to force manufacturers to prove that their supply chains are not inadvertently fueling conflicts and human rights abuses. Henry Ridgwell reports from London.
Video

Video Class Tackles Questions of Race, Discrimination

Unrest in some U.S. cities is more than just a trending news item at Ladue Middle School in St. Louis, Missouri. As VOA’s Kane Farabaugh reports, it’s a focus of a multicultural studies class engaging students in wide-ranging discussions about racial tensions and police aggression.
Video

Video Mind-Controlled Prosthetics Are Getting Closer

Scientists and engineers are making substantial advances towards the ultimate goal in prosthetics – creation of limbs that can be controlled by the wearer’s mind. Thanks to sophisticated sensors capable of picking up the brain’s signals, an amputee in Iceland is literally bringing us one step closer to that goal. VOA’s George Putic reports.
Video

Video Afghan Economy Sinks As Foreign Troops Depart

As international troops prepare to leave Afghanistan, and many foreign aid groups follow, Afghans are grappling with how the exodus will affect the country's fragile economy. Ayesha Tanzeem reports from the Afghan capital, Kabul.
Video

Video Poverty, Ignorance Force Underage Girls Into Marriage

The recent marriage of a 17-year old Chechen girl to a local police chief who was 30 years older and already had a wife caused an outcry in Russia and beyond. The bride was reportedly forced to marry and her parents were intimidated into giving their consent. The union spotlighted yet again the plight of many underage girls in developing countries. Zlatica Hoke reports poverty, ignorance and fear are behind the practice, especially in Asia and Africa.
Video

Video South Korea Marks Gwangju Uprising Anniversary

South Korea this week marked the 35th anniversary of a protest that turned deadly. The Gwangju Uprising is credited with starting the country’s democratic revolution after it was violently quelled by South Korea’s former military rulers. But as Jason Strother reports, some observers worry that democracy has recently been eroded.
Video

Video California’s Water System Not Created To Handle Current Drought

The drought in California is moving into its fourth year. While the state's governor is mandating a reduction in urban water use, most of the water used in California is for agriculture. But both city dwellers and farmers are feeling the impact of the drought. Some experts say the state’s water system was not created to handle long periods of drought. Elizabeth Lee reports from Ventura County, an agricultural region just northwest of Los Angeles.
Video

Video How to Clone a Mammoth: The Science of De-Extinction

An international team of scientists has sequenced the complete genome of the woolly mammoth. Led by the Swedish Museum of Natural History in Stockholm, the work opens the door to recreate the huge herbivore, which last roamed the Earth 4,000 years ago. VOA’s Rosanne Skirble considers the science of de-extinction and its place on the planet
Video

Video Blind Boy Defines His Life with Music

Cole Moran was born blind. He also has cognitive delays and other birth defects. He has to learn everything by ear. Nevertheless, the 12-year-old has had an insatiable love for music since he was born. VOA’s June Soh introduces us to the young phenomenal harmonica player.

VOA Blogs

World Currencies

EUR
USD
0.8957
JPY
USD
120.93
GBP
USD
0.6393
CAD
USD
1.2199
INR
USD
63.470

Rates may not be current.