Gold bullion coins sit on a conveyor belt at The Royal Mint in Llantrisant, U.K. (Photographer: Jason Alden/Bloomberg)

Fund Managers Say Don't Count on the Midterms to Revive Gold

(Bloomberg) -- It’ll take more than election upheaval to restart gold’s rally.

That’s the view of money managers including Stephen Land of Franklin Templeton Investments, who say concerns that the Federal Reserve will continue raising rates will overshadow any short-term boost to haven demand from Tuesday’s midterm vote. The dollar and U.S.-China relations are also likely to reassert themselves as catalysts, they say.

The rally in gold, which in October posted its first monthly gain since March, fizzled last week as a resilient dollar and a rebound in global equities undercut demand. U.S. data last Friday showed hedge funds added to their net-bearish position, and the metal was little changed early on Tuesday before the vote.

The election “won’t be the key driver around gold,” Land, the San Mateo, California-based portfolio manager at the Franklin Gold and Precious Metals Fund, said in a telephone interview Nov. 2. “It’s the outcome of the potential trade war with China, the overall health of the Chinese economy and the Fed actions and how that relates to the U.S. and the strength of the dollar.”

Higher rates diminish the appeal of gold, which doesn’t pay interest, while a stronger dollar curbs demand for the metal as an alternative asset. Both forces have helped push gold futures down almost 6 percent this year.

The buoyant greenback has also eaten into demand for the metal as a haven from market volatility, even as the U.S.-China trade war heated up and geopolitical turmoil such as Brexit simmered. On Tuesday, Vice President Wang Qishan said Beijing remained ready to discuss a trade solution with the U.S., but cautioned the country wouldn’t be “bullied and oppressed.”

Fund Managers Say Don't Count on the Midterms to Revive Gold

Gold futures rose 1.6 percent in October as global equities slumped. Analysts and traders in a weekly Bloomberg survey were split on the outlook for prices amid uncertainty about this week’s vote. On Tuesday, futures were steady at $1,232.70 an ounce at 9:31 a.m. in New York, after easing 0.1 percent on Monday.

Goldman Sachs Group Inc. said it sees a divided Congress as the most likely outcome of the midterms, with Democrats taking the House of Representatives and Republicans keeping a slim majority in the Senate. Luc Luyet, currency strategist at Pictet Wealth Management, says the likely “gridlock” scenario may mean the status quo continues and gold remains in a lull.

“Overall, in our base scenario, U.S. growth should remain firm and rates should continue to move up, albeit gradually, weighing on gold,” Luyet said in an email.

VIX Bets

The skepticism on gold’s outlook comes even amid signs of nervousness in markets. Large speculators have cut their bets that market turmoil will ease, turning net long on VIX futures for the first time since May, according to the latest Commodity Futures Trading Commission data. The Cboe Volatility Index rose to an average of 19.35 in October, the highest since the February spike, as global equities sank the most in six years.

Federal Reserve Chairman Jerome Powell and his colleagues are expected to hold policy steady at a two-day meeting that starts Wednesday, right after the U.S. vote, while leaving the door ajar to a rate increase at their final gathering of 2018. So far this year, the Fed has raised rates three times.

After the election, the U.S. economy will still have a strong jobs market, according to Axel Merk, manager of the $135 million VanEck Merk Gold Trust.

“This means the Fed will continue to hike, more so than is currently priced into the markets,” he said in an email Nov. 2. “The price of gold will do what it has been doing of late: gyrate.”

©2018 Bloomberg L.P.