Gold prices in full swing

Dubai - Strong dollar, Fed rate hikes to keep prices down longer

The recent drop in gold prices may last a bit longer as the strong dollar and US rate hikes will continue to keep the yellow metal under pressure, market experts have said. The price of gold dropped to $1,211.08 (Dh4,444) an ounce on July 19, the lowest since July last year. Spot gold was at $1,228 (Dh4,509) an ounce on Thursday.
In Dubai, the price of one gramme of 24 carats gold was Dh148.75 on Thursday, down Dh1.75 from Dh150.50 on July 16.
Gold declined 2 per cent last week, with no sign of an end to the slide in prices that has shaved more than 10 per cent off its value since mid-May.
"We expect gold prices to remain under pressure as a strengthening US economy continues to hike interest rates leading to an appreciation of the dollar. Moreover, with the US central bank signalling two more rate hikes in 2018, we believe that demand for the non-yielding metal is likely to remain muted," Kankana Datta, senior analyst at Aranca, said.
Gold prices are sensitive to interest rate hike and inversely correlated to the external value of the US dollar.
"As the dollar has appreciated since the beginning of the year, by around 5 per cent on the US dollar index, it has been difficult for gold to press higher. This is arguably the dominant factor driving gold prices currently," Dr Marie Owens Thomsen, global head of economic research at Indosuez Wealth Management, noted.
"The price of gold hit a 12 months' low on July 19 at $1,211.08/oz, which now constitutes a major support level. If it remains unbroken, it would be a natural entry point. If this level breaks, there is a $100 gap until the next support level around $1,100/oz. Only a further appreciation in the dollar should be able to drive the price of gold lower. Hence, whether to buy gold or not becomes a call on the dollar," she continued.
"The gold price has evolved in a corridor between $1,211/oz and Dh1,362/oz since 2016, and our baseline expectations are for this range to hold," she said.
However, Ted Stephenson, executive director of CFA Society Emirates, said geopolitical factors, the chance of a stock market correction and a Federal Reserve policy that could keep the dollar from further strengthening could all contribute to a surge in gold prices.
"Gold is a more volatile asset class than stocks as measured by standard deviation. The three-year standard deviation for a gold share trust ETF is close to 14 per cent versus closer to 10 per cent for the S&P 500. Higher volatility makes gold an attractive asset for speculators who trade on short-term price movements," he explained.
"For investors, the right time to make any investment depends on an investor's return objective, ability and willingness to take on risk and time horizon. While the year-to-date return for gold has been negative, the 10-year return is about just over 31 per cent. By way of comparison, however, the 10-year total return of the S&P 500 including dividends is over 162 per cent," he said.
Gold could do well during periods of low investment sentiment towards traditional asset classes.
"There is currently increasing chatter among investment community of the decade-long economic recovery and rise in equity markets coming to a close. While no one is certain of the timing or the trigger points for end of the bull-run [global trade war, currency war, a geopolitical event, rising rates, wages, inflation, etc], investors have either started or will start to hedge their positions. In such a scenario, gold will slowly come back on to investors' radars. However, we expect this to happen mostly slowly and incrementally," Nikhil Salvi, senior manager of investment research and analytics at Aranca, said.
Dr Thomsen said: "We see rising inflation, albeit moderately, and we see high geopolitical risks. On these factors alone, a certain allocation to gold makes sense in any portfolio. However, the upside in the price will probably be limited in the near term by the surrounding economic environment, which is currently rather dollar favourable."
Economic growth in the US has been accelerating, supported by falling unemployment rate and rising inflation resulting in higher interest rates.
"The momentum is expected to continue, driving the domestic equity and fixed income markets higher. As such an investor would be better off investing in US dollar-denominated bonds than buying gold instruments. As per our research, returns on US 10-year bonds have yielded 7.6 per cent from January 2018 till date as opposed to the capital erosion in gold which was 7.8 per cent in the same period," Soumen Samanta, junior analyst at Aranca, concluded.
- riaz@khaleejtimes.com
 

• Gold and Forex