Gold is next battleground for hawks and doves

Gold is next battleground for hawks and doves
Geopolitical threats and economic weaknesses in major mature markets stimulate demand for gold.

dubai - Investors are concerned that softening US inflation may affect chances of more rate hikes

By Hussein Sayed

Published: Mon 7 Aug 2017, 4:22 PM

The rest of 2017 looks set to be a battleground between the hawks and the doves for gold-linked assets. The pattern is becoming clearer as the second half of the year develops.

In a win for the hawks, gold fell to a 30-day low in June as the USD gained in the wake of the Federal Reserve's second rate hike in the middle of the month. Not even a week later, gold bounced from a low of $1,241 per ounce and went on the rise towards $1,260. The change in fortunes for gold was largely due to lower inflation in the US spooking investors. In mid-July, gold rose again on investor alarm after Federal Reserve chair Janet Yellen expressed concerns over softening inflation. Score for the doves.
Investors are nursing simmering concerns that softening US inflation may affect the chances of more interest rate hikes in the last half of the year. The plan was to keep hiking the key interest rate in Q3 and Q4 based on economic performance. Until her testimony in mid-July, the markets expected Yellen to keep pushing forward with tightening. But the latest developments cast doubt on these hopes.

The softening inflation in the US creates problems. If there are further signs of weakness in the economy, more rate increases in 2017 are in doubt because they are intended to control inflation. The doves would gain then based on the rationale that gold often rises during economic uncertainty.
The crisis over Qatar is also intermittently triggering safe-haven buying for the non-yielding precious metal. The weaker oil price is also feeding into the subsiding inflation rate in the US. Traders fear the Opec supply cut deal will not survive the rift between the powerful oil producers. The deal appears to be in doubt. Opec's oil production has risen again, glutting world markets. This would imply further pressure on the oil price and with it, US inflation. At the time of writing, Brent crude is still under $50 per barrel at $49.1.

Other factors that influence the precious metal include demand from Asia, which accounts for around 50 per cent of the world's physical gold buying. Higher gold prices are weighing on demand from India and China, so at this point, stronger buying interest would come during dips. It must be said that signs that China maintained its growth targets in the first half of the year are reassuring.

There could be some impetus for safe-haven buying from the ongoing Brexit negotiations. Any serious disagreements that hit the headlines could impact risk sentiment. UK Prime Minister Theresa May faces considerable challenges to her policy of a hard Brexit. The trading markets tend to snap up gold when hardball is played over economic treaties. Especially one so extensive as European Union membership.

In other risky geopolitical developments, US President Donald Trump's approval rating is plummeting. As we know from experience, when political outlooks are in doubt, gold is in demand.

There is possible risk from the markets in that equities are in the ninth year of a bull run, and a correction is not out of the question. A correction could happen any time, in which case I expect gold to trade over $1,300.

All told, there are arguments for the gold price to range between $1,200 to $1,300 for the rest of the year, with weakness limited at current levels and more risks to the upside. There are still geopolitical threats and economic weaknesses in major mature markets. Enough to stimulate demand for gold every time concerns rise and risks increase.

The writer is chief market strategist at FXTM. Views expressed are his own and do not reflect the newspaper's policy.

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