Gold has a new shine as prices head south
dubai — The retreat of gold on the rising probability of a US rate hike — after an almost eight-week long relentless rally — is expected to bring back shoppers to Dubai’s jewellery outlets.
“The downward spiral in prices is widely expected to give a muchneeded fillip to Dubai’s gold and jewllery business which has seen trading volumes plummet as the yellow metal rallied in January and February,” precious metals experts said.
“Gold and silver have once again been hit by a triple headwind with the rising probability of a US rate hike on March 15 that is propelling dollar and bond yields higher,” said Ole Hansen, head of commodity strategy at Saxo Bank.
“March 15 is turning into a day full of key event risks. Not only do we have the expected rate hike from the and expiry of the US debt ceiling holiday, we also have the Dutch election, the first of three important elections this year in Europe,” he said.
“We maintain a bullish bias and expect that a rate hike on March 15 is now fully priced in, and gold could benefit significantly in the now unlikely event the FOMC [Federal Open Market Committee] stays on hold,” said Hansen.
“Normally, it is difficult to determine if gold will move higher or lower in the near term,” said Joy Alukkas, chairman of Joyalukkas Group.
2017 is likely to be an interesting year for precious metals, given shifting geopolitical sentiments Gautam Sashittal, CEO of the Dubai Multi Commodities Centre
Gold price drop is always good news as a strong dollar-pegged dirham will get [customers] more ‘bang for the buck’ Joy Alukkas, Chairman of Joyalukkas Group
Even though gold prices have adjusted in anticipation [of a Fed rate hike], further fall in price is a possibility Abdul Salam K.P., Group executive director of Malabar Group
“However, when the US Fed hikes interest rates the dollar appreciates, which leads to gold moving lower. For jewellery buyers, price drop of gold is always good news as a strong dollarpegged dirham will get them more ‘bang for the buck,’”
Abdul Salam K.P., group executive director of Malabar Group of Companies, said gold prices recorded a five-week low on Wednesday. “The major reason behind this is the positive national employment report for February in US, which gave a positive vibe to the stock market.”
“Now the market is consciously waiting for next week’s FOMC meeting and it is almost certain that the interest rate will be raised by 0.25 per cent. Even though gold prices have adjusted on this anticipation, a further fall in price is a possibility. The local jewellery market always reacts to the price fall positively. As most forecasts in the long run are towards a high gold price, local consumers take advantages of temporary price falls. Jewellery shops in the UAE expect good sales during the second half of March.”
As the probability of a rate hike rose to more than 70 per cent, the US dollar rose to a seven-week high against a basket of currencies, while the yield on US twoyear government bonds climbed to levels last seen in 2009.
Gold sank to a five-week low on Thursday, with analysts expecting further losses as investors become increasingly certain that US interest rates will rise this month. Spot gold was down 0.1 per cent at $1,206.76 an ounce by 1330GMT, having dropped earlier to its weakest since February 1 at $1,202.70. US gold futures eased by 0.2 per cent to $1,206.80.
The last two times the FOMC raised rates gold reacted negatively in the run-up to the announcement, only to rally afterwards. In December 2015, gold lost two per cent during the month leading up to the hike, only to rally by 2.6 per cent the following month. The beforeand-after reaction to December 2016 was a drop of five per cent (Donald Trump’s election win playing its part) followed by a 3.4 per cent rally.
During the first half of 2016, gold prices increased nearly 30 per cent to reach a high of $1,375 an ounce mostly fuelled by the emotion of the Brexit vote in late June when the Fed Fund futures softened their rate hike path. In the second half. Prices declined 20 per cent from those highs down to $1,122 in December despite the surprise result of Trump winning the White House causing a temporary jump in gold prices.
“2017 is likely to be an interesting year for precious metals, given shifting geopolitical sentiments,” said Gautam Sashittal, CEO, DMCC. The gold trade through Dubai was valued at $31.6 billion at the end of the first three quarters of 2016, making it the second biggest contributor to Dubai’s non-oil foreign trade, said Sashittal.
While unexpected events and uncertainty prop up the price, factors like interest rate hikes and a stronger dollar exert downward pressure, experts said.
— issacjohn@khaleejtimes.com