Gold bugs stake claims
Geopolitical tensions and the Fed’s measured tone have made traders upbeat about the price of the precious metal. By Nuntawun Polkuamdee
Gold got off to a strong start in 2017 as a spate of uncertainties, including geopolitical tensions over the Korean peninsula, US missile strikes against Syria, France’s presidential election and US President Donald Trump’s rhetoric on trade, prompted investors to flock to gold as a hedge against crisis.
Spot gold prices surged more than 10% to just shy of US$1,300 per ounce in mid-April from $1,146 at the end of 2016.
The US Federal Reserve’s less hawkish tone on future rate hikes earlier this year also drummed up demand for gold, regarded as a non-interest-bearing asset. The slow pace of interest rate hikes has convinced some investment in the precious metal remains worthwhile.
However, the gold rally is fizzling out as geopolitical tensions smoothed after pro-EU Emmanuel Macron won France’s presidential election and the Korea peninsula has not erupted yet. Fading uncertainties have sapped demand in buying gold as a safe haven, which has some questioning whether the run-up in price is over.
Piboonlit Viriyaphol, director of the Gold Research Center, says gold usually has a price correction following recent gains. In general, gold and other safe haven assets gain in an uncertain environment and decline when uncertainties recede.
Even though geopolitical concerns are decreasing, the chances of uncertainties flaring up remain, he says.
Factors that warrant close monitoring are Mr Trump’s ability to deliver his economic policy into practice, the presidential election in Germany as it is the largest economy in the euro zone, the US economic recovery and interest rate hikes, the health of the global economy, and terrorism.
“Both positive and negative factors exist for gold, which increase the likelihood of price volatility. The chance to get a 5-10% return from investment in gold this year is not too much of a stretch,” says Mr Piboonlit.
The price of the precious metal could be range-bound for a while, depending on news at that time, he says.
Mr Piboonlit says a price near $1,200 per ounce or below 20,000 baht per baht weight is an entry point for investors, while they should sell when the price climbs close to $1,300 an ounce.
The centre’s latest survey released in April found dealers were confident the downside risk in price was limited. US interest rate movement is the major concern among gold dealers and three rate hikes for this year have largely been priced in, he says.
The Fed maintained its policy rate at 0.75-1% at its May meeting, but signalled the year’s second rate increase is just around the corner and the market is anticipating it could come in June.
Mr Piboonlit recommends investors allocate 10% of assets to gold and increase the weighting to 15-20% if the local price falls to around 18,000 baht per baht weight.
Thipha Nawawattanasup, managing director of YLG Bullion International, says profit-taking after the recent rally was largely attributed to the global price’s retreat, and now is the time for investors to scoop up the metal.
She says near-term support for the local gold price is at 20,000 baht per baht weight, with the next level at 19,700 baht.
Several international banking firms still have a positive sentiment on gold, though some have cut their 2017 price forecasts.
UBS says it has been bullish on gold, given expectations for a moderate interest rate, a weaker US dollar against other major currencies and general macro uncertainty, during which it encourages diversification into gold. However, last month UBS lowered its 2017 gold forecast to $1,300 an ounce from $1,350.
UBS also trimmed its 2018 prediction to an average of $1,325 per ounce from $1,450 previously. The banking giant says a slower than expected increase in gold interest during the first quarter, a faster pace of tightening than it previously expected, and potential for higher bond yields in the euro zone, especially as political uncertainty clears and data continues to improve, are factors leading to the revision.
Credit Suisse is maintaining its bullish view on gold, estimating it will hit $1,400 an ounce by the final quarter this year, though its average price for the full year was trimmed to $1,323 from $1,338 previously.
ABN Amro expects a gold price of $1,300 for the end of 2017 before increasing to $1,400 by the end of 2018, while Canada’s Scotiabank appears to be bearish on gold, anticipating prices for 2017 and 2018 at $1,200.
Jitti Tangsithpakdi, president of the Gold Traders Association, says the gold price will gradually rise this year, underpinned by geopolitical conflicts.
“In my view, the US will not enter into more wars, particularly in North Korea, which is far away from the US, closer to China and Russia. If tension there develops into war, it will not benefit that many, so I think there is only a slim chance of war,” says Mr Jitti.
He projects gold to move in a range of $1,150-1,350 an ounce this year. Mr Jitti recommends a strategy to buy when the price corrects and take profit when the price increases. The investment ratio in gold should depend on each investor’s risk appetite and investment experience, he says.
Prapas Tonpibulsak, chief executive at Talis Asset Management, says gold should account for 5-10% of an investment portfolio in 2017, but equity is his main focus as share prices remain low and double-digit growth in listed companies’ earnings is expected.
“We don’t think World War III will happen, but if the US and other countries involved in disputes continue with their verbal threats, the prices of gold and other assets will be volatile. Gold is a safe haven asset and when geopolitical tension escalates, its price usually rises, though the key factors affecting most assets are the US economic and currency policies,” he says.