Dubai: For investors who have bought gold, don’t get scared by the $60 an ounce drop in prices just after the US elections because the best is yet to come.
Market experts say rising real interest rates, which is arrived at subtracting interest rates from inflation, was the root cause behind the recent debacle in prices.
But despite attempting to breach the downtrend, which has been in place since 2011, for five times this year. Gold has stood its ground.
And with inflation rising faster than interest rates — a situation that market experts feel would be a feature of Trump administration — would bode positive for gold.
“Trump’s policies are largely based around fiscal easing though tax cuts and bigger government spending plans. These policies should be inflationary, which reinforces our view that US inflation will move ahead of nominal rates, meaning that real rates, which are negatively correlated with gold, will come under greater pressure,” and therefore it would be positive for the yellow metal, said Giovanni Staunovo, commodity analyst at UBS Wealth Management.
In a rising rate scenario, investors normally prefer treasuries as yields rise, and therefore negative for the other safe-haven metal like gold. But in a situation where inflation is rising faster than interest rates, what is called as negative real rates, investors normally seek refuge in the yellow metal for wealth preservation.
Even Ole Hansen, head of commodity strategy, concurred with UBS’ Staunovo.
“If bonds are going up, because inflation is going up, then eventually inflation expectations will see a catch-up with the rise we see in bond yields. So real yields will come down again. Once that happens, gold should find support,” Hansen told Gulf News while on his field visit.
Gold may fall to a low of sub-$1,200 an ounce levels, but may see a swift recovery next year to even scale ahead to previous highs, he said.
“Gold would stabilise between $1,170-$1,210 and eventually move higher again. My stop loss is $1,170, if it falls below I’ll have to readjust my portfolio. If gold breaches above $1,250 an ounce, that would create a lot of confidence,” Hansen said.
Shining silver:
But more than the yellow metal, silver is expected to shine. UBS expect silver and platinum to outperform gold over the next 12 months.
“The improving industrial demand outlook — for example, from an upswing in the tech and electronics cycle — should tighten the market and retain investors’ interest in silver. We remain positive on platinum over the next six and 12 months,” Staunovo said.
Silver has been one of best performing precious metals with a 20 per cent gain, compared to 13.6 per cent gain in the yellow metal. Platinum has gained 8 per cent since January 1.
The latest data indicate that the recovery in global industrial activity continues, with a strong uptick in Europe in August. Meanwhile, car sales continue to increase in Europe. About one-fifth of total platinum demand ends up in auto-catalysts in Europe.
Headwinds
But after the US vote, market experts feel there are more headwinds.
“We are not out of the woods yet. There are elections coming up in Italy, France and Germany amid the anti-establishments vote during Brexit and the US presidential elections,” Hansen said.
“It will impact commodities, as it carries the risk of euro being under pressure, and dollar may move higher. The wouldn’t give the ECB to raise interest rates, so the gap between the ECB, and the US may remain wide. The dollar has the potential of moving higher, but a lot of other things are taking place,” Hansen added.
Re-adjustments
Markets in general is undergoing massive readjustments after the surprise vote in the US elections, much severe than the Brexit poll.
“We saw the bull market in bonds for the past 30 years, and if it’s the end of the bull market then a lot of readjustments will need to take place. Bond market will have to be looked at for further direction in commodities,” Hansen said.
