By Barani Krishnan
Investing.com - The expectation was that 2021 would be a brilliant year for gold. While it may still turn out to be so, the first week of the year is proving excruciating for longs in the yellow metal, stunned by their worst weekly loss since November.
Both futures and the spot price of gold, which reflects real-time trades in bullion, lost more than $65 an ounce on the week, or over 3%.
The plunge came as investors pulled money from the haven to plow into U.S. Treasury yields, which surged to March highs. That threw a lifeline to the battered Dollar Index — the contrarian trade to gold — which rose above the key 90-level.
Some exited gold to chase record highs in bitcoin — which has become a growing darling of speculators all over, drawing as much mania as Tesla (NASDAQ:TSLA) shares on Nasdaq.
“The institutional interest for bitcoin is starting to really hurt the long-term outlook for gold,” said Craig Erlam, analyst at online broker OANDA. “The bitcoin bubble will pop at some point over the next few months if not sooner, but until then gold is losing the backbone of big-money interest.”
Gold for February delivery on New York’s Comex settled at $1,835.40 an ounce, down $78.20, or 4.3% on the day. A week ago, February gold hovered at $1,901.60. The drop on the week was the most for gold since the week ended Nov. 7 when Pfizer (NYSE:PFE) announced the 95% efficacy in its Covid-19 vaccines that suddenly became a game changer in fighting the pandemic.
This week’s meltdown was even more unusual given that it came as the monthly U.S. employment report showed a loss of 140,000 jobs in December — the first negative growth of its kind since April. Typically, when jobs reports are bad, gold acts as a safe-haven.
This time, however, the narrative was different — even ludicrous — for the believers in gold.
The story on Friday was that with all three legislative houses — i.e. the White House, the House of Representatives and the Senate — coming under his Democratic Party’s control, President-elect Joe Biden will have “stability” of rule that dilutes the need to take cover in safe assets like gold.
Never mind that the incoming president has hinted that his first order of business might be issuing checks of $2,000 for each American hurt by the coronavirus pandemic.
Biden has also said he plans to push out at least two more comprehensive stimulus packages that could add trillions to the U.S. federal debt, already estimated at $3.8 billion for 2020.
In ordinary times, the combined impact of such spending on the dollar logically makes gold a natural hedge.
But these are extraordinary times when logic gets tossed out of the window. Treasury yields jumped 3% on the day and 21% on the week — the most since the week ended Aug 7, when a similar rally in bonds killed gold’s $2,000 plus rally. The yellow metal has never regained its glory since tumbling from the record high of nearly $2,090 that week.
“There’s speculation that ETF investors are about to abandon the safe-haven trade since the U.S. political situation will see stability with President-elect Biden and as the U.S. begins to speed up their vaccine rollout,” Erlam of OANDA added. “Someone big or a hedge fund is abandoning their bet on bullion and that could reverberate further.”