GOLD FEARS NO FIRE
DUBAI — Rising inflation, ballooning US debt, economic growth in India and China may drive gold prices towards $1,480 (Dh5,446) per ounce level this year, market strategists said.
However, they said, gold may face resistance level at $1,375 (Dh5,060) as expected US Fed rate hike, strong dollar and profit taking may keep downward pressure on the prices.
Considering the current volatility in global equity markets, geopolitical risks and recent drop in gold prices, experts believe staggering their gold purchases would benefit the buyers.
“The best option is to invest in small units when prices drop. Moreover, paper gold or gold ETF can be considered as a better alternative than investment in physical gold,” Anurag Bhagchandani, analyst at Aranca, said.
Spot gold was down 0.2 per cent at $1,328.74 (Dh4,887) on Friday as the US dollar climbed from last week’s three-year low on the back of higher US Treasury yields.
US April gold futures settled down $2.40, or 0.2 per cent, at $1,330.30 (Dh4,894) per ounce. Gold posted its biggest weekly decline in 2-1/2 months. Spot gold fell 1.4 per cent this week, its biggest weekly decline since early December, after failing to sustain a brief
Gold has performed extremely well against dollar over the past two years and can do well again this year Davis Hall, global head of forex and precious metals, Indosuez Wealth Management
push back above $1,360 (Dh5,000) an ounce on February 16. It is still up a little over six per cent since mid-December. In Dubai, 24k gold was at Dh161 per gramme on Saturday falling Dh3.75 per gramme from Dh164.75 on February 18.
Gold traded higher last week, in response to the dual support from a weaker dollar and continued focus on inflation. It is traditionally considered a good hedge against inflation.
“Gold once again challenged an area of resistance which has been rejected on numerous occasions during the past couple of years. Breaking above the 2016 high of $1,375/oz [Dh5,060] could see gold mount an extension towards $1,436 [Dh5,284] and ultimately $1,480/oz, [Dh5,446]” Ole Hansen, head of commodity strategy at Saxo Bank, said. “We maintain a bullish outlook for gold but would use current levels to reduce exposure and either wait for a pullback towards $1,300 [Dh4,784] or a break above $1,375/oz [Dh5,060] to re-enter.”
“Our bullish sentiment derives from the belief that inflation will receive increased attention as it moves higher, while geopolitical risks remain elevated as highlighted at the annual Munich Security Conference which showed an increased amount of distrust among world leaders. The market also does not like the uncertainty created by the unpredictability of the US president. Investors are likely to continue to seek tail-end protection against the increased risk of a correction in other asset classes, particularly stocks and bonds but potentially also cryptocurrencies,” Hansen argued.
Davis Hall, global head of forex and precious metals, Indosuez Wealth Management, advised to maintain the gold holdings acquired at lower levels and to watch the key pivot point at $1,380 (Dh5,078) per ounce before adding to their positions.
“Gold has performed extremely well against dollar over the past two years and can do well again this year. An attractive entry level is now seen between $1,315 [Dh4,839] and $1,285 [Dh4,728] per ounce,” Hall said.
He said gold has exhibited its longstanding safe haven status over the past 24 months despite record-breaking performances on Wall Street equity indexes.
“Inflation fears are on the rise
We maintain a bullish outlook for gold but would use current levels to reduce exposure and either wait for a pullback
Ole Hansen, Head of commodity strategy at Saxo Bank
across the board as salaries are negotiated higher on both sides of the Atlantic. This coupled by runaway budget deficit spending will serve to neutralise the well-expected FOMC rate hikes. Gold thus remains a buy on dips alternative to hedge high equity-exposed portfolios,” Hall said.
“I am convinced gold can have another attempt at the all-highs as the market gradually factors in a potentially toxic mixture of higher inflation, unaddressed record debt levels and lesser QE support from central banks less willing to hold our hands in the months ahead. We favour a range of $1,270-$1,470 [Dh4,673-Dh5,409] for this year.”
Gold does not provide any income, so a long-term investor in gold is looking for capital appreciation through an increase in the price of gold. Diversification of an investment portfolio is another common reason for buying gold as gold prices have typically increased when stock markets have decreased.
“For an investor with a long-term horizon, who follows the common investment advice that gold should be five to 10 per cent of an investment portfolio as a matter of portfolio diversification, it could be the right time to continue to invest in gold following a systematic approach to investing and portfolio diversification,” Ted Stephenson, executive director of CFA Society Emirates, said.
“In the short term, economic trends and cycles will mean continued volatility in the price of gold but in the long term, with continued economic growth in India and China, combined with the cultural importance of gold in these two countries means that the demand for gold will continue to increase,” Stephenson said.
Bhagchandani believes higher interest rates in the US in the near term would limit demand for noninterest bearing gold, exerting a downward pressure on gold prices. However, he said, investors with a long-term investment horizon could invest at current levels, expecting higher returns in the future.
“In the short and medium term, we are bearish on gold prices as we expect no deterioration in geopolitical risks and recession during 2018-19. However, in the long term, we anticipate strong growth in demand from the emerging markets to boost gold prices,” he said.
Contrary to his opinion, Hansen believes, all FOMC rate hikes in this current cycle represented a buying opportunity for gold with investors buying into the weakness seen ahead of the announcement.
“Currently the implied probability of three rate hikes is priced at 37 per cent while four hikes are at 22 per cent. In other words, a change in expectations towards five rate hikes may trigger another round of uncertainty unless it is being driven by accelerate inflation in which case gold may perform well despite rising rates.”