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Time to go bullish on gold?

Muhammad Riaz Usman/Dubai
Filed on June 20, 2017 | Last updated on June 20, 2017 at 12.35 pm
Time to go bullish on gold?

The UAE jewellery retailers are expected to witness a massive buying in the upcoming festive season.

Gold prices are descending and the trend may continue in days to come due to hawkish tone of US Federal Reserve, low inflation and strong dollar, experts said.

However, geopolitical situation and economic risks in the wake of US President Donald Trump's isolation policy will play a critical role in driving the bullion market, they said.

The steady decline in yellow metal prices after the Fed's decision to increase interest rate by 0.25 per cent offers 'golden opportunity' to the UAE residents and national to buy gold and jewellery ahead of Eid Al Fitr and beginning of festive season in Indian sub-continent.

Gold fell more than 3 per cent from a high of $1,295.95 (Dh4,769) per ounce on June 6 to $1,253.10 (Dh4,611) on Friday. On Monday, one gramme 24 karat declined Dh5 to Dh151.50 in Dubai from Dh156.50 on June 6.

Spot gold traded at $1,251 (Dh4,603) an ounce by 0852GMT in London on Monday, up from an earlier $1,248.63 (Dh4,592), its lowest since May 24.

The third rate increase by the US Federal Reserve in six months by a quarter point to 1-1.25 per cent on June 14 spark a global sell-off and resulted in a plunge of gold prices. Bullion is sensitive to higher interest rates because they push bond yields higher, increasing the opportunity cost of holding non-yielding gold, and tend to boost the dollar.

"Gold has been spooked by the hawkish tone from the Fed which triggered some long liquidation both in futures and exchange-traded funds," said Ole Hansen, head of Commodity Strategy at Saxo Bank.

Cautious outlook

Chiradeep Ghosh, research manager for Securities and Investment Company (Sico) and Member of CFA Society Bahrain, expects that gold will remain range bound with a negative bias, as Fed guided at an inflation expectation to remain below its target level of 2 per cent for the year, which should be negative for gold prices. It means the UAE jewellery retailers are expected to witness a massive buying in the upcoming festive season. A larger diaspora from India buys gold jewellery on Akshaya Tritiya, Pongal, Onam, Ugadi, Gudi Pavda, Baisakhi and Diwali.

Ghosh said that investors would maintain a cautious outlook towards gold, despite healthy demand from the two largest importer India and China.

"We expect gold demand to remain upbeat in India as we move into the second-half of the year, being a festive season followed by the wedding season. Also post the remonitisation move last year by the Indian Central Bank, liquidity got sucked out of the system. However, with liquidity stabilisation we expect people to park part of their undisclosed earnings in physical gold," he says.

Gifting gold is also a part of marriage traditions in Indian society. It is estimated that weddings generate approximately 50 per cent of annual gold demand.

Geopolitical risks

World Gold Council believes that introduction of GST (Goods and Services Tax) may lead to more transparency and efficiency in the gold supply chain and would support gold demand in India.

However, Ghosh said that geopolitical risks, US government policies and dovish stances by the European Central Bank will support gold prices.

Dr Marie Owens Thomsen, global head of Economic Research for Indosuez Wealth Management, also echoed the concern over the uncertainties and risks.

"Higher US rates raise the opportunity cost of owning gold. Geopolitical risk is high around the globe, economic policy uncertainty is high in many key economies, and in such a state of uncertainty a moderate and gradual increase in US rates ought still leave the opportunity cost of owning gold at an acceptable level," she told Khaleej Times.

Expressing her view on gold's projection, Dr Owens said the range in the gold price over the past 12 months has been $1,123-1,375.

"Currently trading at $1,254, it is close to the 50 per cent Fibonacci retracement over this period and if it brakes $1,250, it could pull back towards $1,200.

"On the upside, the price needs to breach 1,278 in order to go higher still. Taking a longer view, since 2013, the price has evolved between $1,046 and $1,380. This is probably still an exploitable range longer term," she explained.

Dr Owen said that she always looks at gold as a fundamental investment and a long-term holding that has the advantage of being a reasonably cheap hedge against inflation and geopolitical risk.

"We believe that a small percentage of almost anybody's portfolio would do well to be invested in gold. However, we are not thinking that it will be the best-performing asset necessarily. We like to say that investors should own some gold not to become rich but to remain wealthy," she said.

Dovish rate hike

Hansen of Saxo Bank said that weak US inflation and retail sales led the market to believe a dovish rate hike was coming.

Instead, Fed "opted to maintain the trajectory for future rate hikes while also unveiling plans to shrink the balance sheet. While 10-year bond yields remain close to a gold supportive 7-month low the selling pressure has been driven by renewed dollar strength and the closing down of weak longs. Key levels of support at $1,255 followed by $1,245 per ounce," Hansen told Khaleej Times.

He said that gold in the short-term exposed to additional long liquidation, especially if the dollar continues to recover.

"But just like last time when gold found support towards $1,220 we expect another round of underlying bids to emerge. Looking for support at $1,255 and $1,245 and only a break below $1,220 could see the bullish story begin to fade," he said.

"Medium- to long-term we still believe it is only a matter of time before the downtrend from 2011 is proper broken. A confirmation of that would be a break above $1,296, which currently act as a double top. We maintain our end of year forecast of $1,325 with the price risk being skewed to the upside," he added.

Hansen said that investors have quietly been accumulating gold, especially through exchange-traded products as they seek a hedge against the growing divergence between high stocks/low volatility and rising world economic policy uncertainty.

He said that geopolitical and economic risks such as North Korea, Trump's isolation policy will play a critical role in driving the gold price.

"Market pricing in too much US growth and too optimistic on rate hikes," it could also be a detrimental in gold.

- riaz@khaleejtimes.com





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