Gold rallies as Fed stays dovish
Gold is currently hovering around its four-month high, and some analysts say there could be more near-term upside as the precious metal benefits from an increasingly dovish U.S. Federal Reserve.
Gold prices on Monday fell 0.9 per cent to US$1,172.80 a troy ounce on the New York Mercantile Exchange, but they have had a big rally this month that has driven prices up by nearly seven per cent.
On Thursday, the precious metal rallied to US$1,187.50, its highest level since June, the highest close since mid-June.
“With the September FOMC minutes released last week revealing a surprisingly strong resolve across Fed members in their decision to delay liftoff, a hike in October is all but priced out with gold a winner for now,” Citigroup analysts said in a note to clients Monday.
Optimism on gold is creeping up after prices sunk 4.8 per cent in the third quarter, the worst quarter in a year.
UBS analysts last week noted in a report that investors are steadily increasing their positioning in gold as it becomes clear that the U.S. economy may be weaker than expected. Disappointing data from the U.S. tend to drive gold prices higher, since gold moves inverse to the U.S. dollar.
The turning point for gold came on Aug. 11, when China moved to devalue its currency and set off a wave of risk-off selling that created volatility in global stock markets.
Demand for other commodities such as copper, which relies heavily on China, sunk, while investors flocked to gold in what is likely a sign that gold is acting like a haven again.
There could be even more upside for gold if the Fed decides it will not hike interest rates this year. As recently as August, the market was pricing in a benchmark interest rate hike by the Fed at least once this year, but a spate of disappointing data in recent months has cast doubt on that possibility.
U.S employment, inflation and consumer spending data have all shown hints that a weakening global economy is weighing on the American economy more than expected.
But while the optimism on gold may be growing, the precious metal is still nowhere near its all-time high reached in 2011, when it traded at more than US$1,900 an ounce.
And the optimism may not last. Dutch bank ABN Amro, which was one of the few that raised its outlook for gold in the next two years on a more dovish Fed, said it now expects prices this year to finish at US$1,100, instead of its original US$1,000 forecast, but well off the current price. It also predicts that prices will end next year at US$900, from its earlier call of US$800.