Dubai: Gold, which survived a scare last year, may lose its sheen.
Gold prices managed to gain more than 7.5 per cent in 2016, despite falling in the last quarter due to expectations of higher growth and interest rates under the new Trump administration in the United States.
“In our view, the sharp move in US 10-year Treasuries and US dollar strength are the main triggers behind gold’s sell-off. Investors have apparently switched from fearing to embracing president-elect Donald Trump’s economic policies,” Max Kunkel, ultra high net worth investment strategist at UBS Wealth Management told Gulf News over an email.
UBS has a three month forecast of $1,100-1,250 an ounce in gold. “While our view continues to expect two rate hikes in 2017, we acknowledge risks of a faster pace. Hence, we have cut our forecast accordingly,” Kunkel from UBS said.
Rate hikes is expected to help dollar, and along with that rising bond yields doesn’t bode well for the yellow metal.
“As we see some more strength of the US dollar and believe an overshooting of US treasury yields is possible early into next year, we see some more downside for gold,” said Carsten Menke, commodity analyst, Bank Julius Baer & Co. Ltd.
Bank Julius Baer has a twelve-month price target of $1,150 per ounce.
Not in favour:
Even the fundamentals on investment and physical demand front have not been in favour of gold.
Investors continue to shed holdings in bullion-backed exchange-traded funds, with assets down 1.1 metric tons to 1,778 tons as of Tuesday, the lowest since May. That’s the 32nd day the holdings shrank for the longest losing run since September 2004.
“Beyond the stronger US dollar and rising US treasury yields, ETF selling is the biggest reason for gold’s weakness. Selling has been very persistent since the US presidential elections. We have seen the biggest selling from US-listed funds,” said Menke from Bank Julius Baer.
Global holdings have dropped as the Fed raised rates by a quarter-point on December 14 for only the second hike since the central bank cut borrowing costs to near-zero in 2008. Policymakers have signalled three increases may be warranted in 2017, according to the latest quarterly projection.
In the latest World Gold Council update, overall demand during the third quarter of 2016 was 993 tonnes, a quite significant dip by 10 per cent compared to the 1,105 tonnes in the same period last year. And with gold prices averaging $1,334 an ounce during the three-month period, total consumer demand had a sharp 26 per cent decline to 683 tonnes from 917 tonnes in the same quarter last year.
Diversification:
Despite all the factors pointing against gold, Emirates NBD’s Gary Dugan feels gold offers a diversification option for investors.
“Investors can attain a further degree of diversification through gold, historically performing well during periods of higher inflation and lower real growth,” Dugan, who is the chief investment officer at Emirates NBD said.
Gold has delivered on average annualised returns of 4.5 per cent according to past records, and under more favourable scenarios, the yellow metal has given high single-digit returns.
“Gold at the same time would offer tail-risk protection to the whole portfolio, an appealing feature considering the degree of uncertainty related to the outlook for global growth,” Dugan added.
UBS feels that gold may recover to $1,300 in the second half. “Likely weakness in the US dollar, political and policy uncertainty, and negative US real rates are all potential drivers for a gold revival into the second half of 2017, albeit on a more modest scale,” UBS’ Kunkel said.
