Deutsche Bank Shares Rise After Shakeup

ENLARGE Deutsche Bank managers held meetings and conference calls with employees in London, New York and Frankfurt, above. Photo: Martin Leissl/Bloomberg News By Jenny Strasburg and Jenny Strasburg The Wall Street Journal CANCEL Biography @jennystrasburg Google+ [email protected] Juliet Samuel Juliet Samuel The Wall Street Journal CANCEL Biography @CitySamuel [email protected] Oct. 19, 2015 1:46 p.m. ET 0 COMMENTS Deutsche Bank AG DB 2.48 % employees and investors on Monday positively graded the lender’s management and organizational overhaul, saying they welcomed clarity on how businesses will be judged going forward. They also said next week will be crucial to understanding Deutsche Bank’s

Gold's Role as Safe-Haven Investment Wanes

A bar of gold is cleaned with a pin needle drill at Evolution Mining Ltd.'s gold operations in Australia. Traders and analysts say the metal’s role as a safe-haven investment in times of turmoil has waned recently. ENLARGE
A bar of gold is cleaned with a pin needle drill at Evolution Mining Ltd.’s gold operations in Australia. Traders and analysts say the metal’s role as a safe-haven investment in times of turmoil has waned recently. Photo: Bloomberg News

The price of gold, which typically swings with political, economic and inflationary threats, these days moves in step with a different force: the U.S. Federal Reserve.

Traders and analysts say the metal’s role as a safe-haven investment in times of turmoil has waned recently, with the price more likely to fluctuate on shifting expectations about when the Fed will raise rates.

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Gold has rallied 5.3% this month after a sour September jobs report encouraged investors to bet there will be no hike this year. Higher rates, when they happen, are widely expected to undermine future demand for gold, which doesn’t pay interest so becomes less competitive against investments that do. Prices slumped to five-year lows in July when expectations for rate increase ran high.

“Gold is trading as a proxy for expectations of U.S. interest rates,” said Kevin Norrish, who heads commodities research at Barclays. BCS 0.78 % “People have looked at gold and expected it to act as a safe haven and it hasn’t.”

The shift could affect gold’s value over the long-run, as more investors grow disillusioned with gold as a haven and turn to alternative safeguards

Historically, gold has reacted to political and financial upheaval. In the first weeks of 1980, gold jumped by over 60% soon after the Soviet Union sent troops into Afghanistan and as Iran’s Islamic revolution played out. Gold rallied by over 150% from October 2008 to September 2011, in the wake of economic turmoil in the West and as investors bet inflation would gain from the money central banks pumped into markets.

But in August, when fears about China’s economic health triggered a 17% collapse in oil prices and 11% plunge in the S&P 500 stocks-index, gold gained just 5.9% before falling back. The pattern has repeated throughout 2015, with events such as Russia’s involvement in the separatist war in Ukraine and in Syria moving oil markets but barely affecting gold.

“It’s not been doing well on the geopolitical side,” said Michael Mullaney, who oversees $ 11.5 billion at Fiduciary Trust. About 2% of Mr. Mullaney’s portfolio is in gold, a position he recently had to defend at a meeting of the money manager’s investment committee.

To be sure, some argue investors see little to feel afraid about.

“People in the U.S. don’t need a safe-haven right now, our economy is doing okay,” said Joe Foster, portfolio manager of physical gold and the equity of gold miners for Van Eck Associates Corp. Mr. Foster currently holds no investments in physical gold.

Others argue it is already too expensive to act as a haven unless the mood darkens substantially. Since the start of 2000, gold has increased by over three times. The S&P GSCI, an index that tracks the performance of 24 commodities, has gained 86%.

Lately, gold prices have closely shadowed the short-dated Treasury market. Expectations of higher interest rates tend to lift Treasury yields and weigh on gold prices, so the two typically move in opposite directions. In recent weeks the relationship between the two, as measured by a 200-day historical correlation, reached its strongest level in 3.5 years.

Gold’s new trading pattern reflects a world in which financial markets are waiting for the Fed to act after a record period of keeping borrowing costs near zero. That waiting game is drowning out other market influences. Its hold over gold has also been exaggerated by the absence of inflation, which has stripped the metal of another traditional role: a hedge against galloping prices.

Fed officials have said that a rate increase in 2015 remains on the table, though some investors are skeptical especially given lackluster economic data out of the U.S.

While rates have always impacted on gold, the effects have rarely been as pronounced as now. The Fed’s last period of rate increases, in 2006, did little to knock gold off a 10-year rally to a record price of $ 1,888 in August 2011.

An extended period of low rates could be good for gold in other ways. Some investors say that the ultraloose monetary policies in place since the financial crisis will finally begin to stoke inflation. Then investors will flock to gold again to protect themselves against rising prices, said Seymour Schulich, a billionaire Canadian investor and former mining executive.

“I have 25% of my assets in gold and sleep very well at night,” Mr. Schulich said.

Write to Alistair MacDonald at [email protected] and Tatyana Shumsky at [email protected]


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