Gold rallies on tensions; will it last?

Dubai gold market analysts expect the rally to be short-lived, but would continue for a few more days amid worries.

Gold lived up to its traditional role as a safe haven asset as prices of the yellow metal climbed one per cent to their highest in almost a year on Monday after North Korea's latest and most powerful nuclear test stirred up investors' appetite for non-risk assets.
Spot gold was up 0.9 per cent at $1,336 per ounce by 0915GMT, after earlier touching its strongest level since late September 2016 at $1,339.47.
Dubai gold market analysts expect the rally to be short-lived, but would continue for a few more days amid worries that North Korea might launch more missiles in the wake of its sixth and largest nuclear test.
"We hope the current rally is temporary. If it were not long lasting, the price hike would have little impact on the jewellery trade. However, more than the price level, it is the extent of the volatility that usually affects the market," said Chetan Karani, secretary-general of the influential trade body, the Gold and Jewellery Group.
"Even at a higher level, if gold price remains steady, consumers will have confidence in the metal. It is wild fluctuations that often keep buyers away," said Karani.
Tarun Satsangi, head of Research for Commodities and Forex at Globe Commodities, argues: "If there is a massive surge in geopolitical tension, especially on the Korean Peninsula, gold's appeal of safe haven will certainly grow stronger.
"In such a case, we can't rule out the possibility of a further rally from here on. But the prices should sustain above the $1,300 an ounce mark."
The best part is that the prices have come out of the nine-month-long range between $1,180 and $1,305, which raised the possibility of a rally from here on, taking the prices to probably $1,355-$1,375 range, where last year's high was recorded during the US elections in November, said Satsangi.
Apart from North Korean sabre-rattling, a weaker dollar, the looming debt ceiling, President Trump's threats to scrap the North American Free Trade Agreement, and the low yield environment are all working on the sustained rally of gold, "the bad news metal," precious metal experts said.
They pointed out that gold regained all losses since Donald Trump became president. Continued uncertainty over North Korea's intentions regarding missile testing and the concerning response from the US is likely to keep gold supported in the near-term.
"The improving global economic backdrop will take a back-seat for gold prices until geopolitical tension eases," said Martin Arnold, director, Macro Strategist at ETF Securities.
Hussein Sayed, chief market strategist at FXTM, noted that gold, treasuries, Swiss franc and the yen have all outperformed, as investors try to assess the potential impact of North Korea's nuclear test. "The markets' reaction seems similar to when missile launches have taken place in the past; investors sell stock, rush to safe havens, assess the situation, and then buy the dips as tension eases. While stocks fell in Asia, the selloff was not massive, mainly because the nuclear test occurred over the weekend and there was enough time to digest the news."
"It is becoming a recurring theme: North Korea launches or threatens to launch a missile, gold rises, stocks tumble, then things calm down and stocks more than make up their losses. But is it different this time?," Fawad Razaqzada, market analyst, Forex.com.
As far as gold is concerned, the precious metal continues to break key resistance levels. After taking out and holding above the $1,290-$1,300 key resistance area, gold has now hit $1,337/8, the November 2016 high. At almost $1,340, the metal achieved its best level overnight since September 2016, before pulling back a little, said Razaqzada.
"As before, our next immediate bullish objectives remain at $1,352, the 161.8 per cent Fibonacci extension level, and then at $1,375, the 2016 high. But how it may get to these levels we are not so sure," said Razaqzada.
Analysts argued that only a slide below $1,300 would propel gold prices to slip in the short term. But a decline will attract fresh investment buying. The $1,200-$1,150 range seems to be a strong base for now while the ceiling will be near the $1,375 an ounce mark.
Precious metals analysts are of the view that several other factors also would have a positive repercussion on gold prices. These include softness in the US treasuries; fading prospect of a third rate hike in the United States this year, continuous weakness in the dollar, which has plunged to 18-month low; and Donald Trump-led turmoil in White House.
However, they argue that factors can dent the prices of the yellow metal are correlated and, one event can drive the value of all others one way or the other.
"If North Korea tensions cool off, the investor will certainly dump gold and rush to buy riskier assets. If inflation in the US, which has been benign as of now, starts perking up to the Fed's expected target and US jobs growth picks up momentum, it will push the dollar and US bond yields up due to the likelihood of another rate hike and that will lead to softness in gold prices," analysts said.
The US Central Bank's move to start $4.5 trillion worth balance sheet tapering in a phased manner will also have negative repercussions on the prices of the yellow metal in the short term, they said.
- issacjohn@khaleejtimes.com