Dubai: Gold seems to have lost favour among investors, in the backdrop of rising interest rates in the United States and therefore a stronger dollar. Much more downside is expected in the yellow metal, analysts say, which could push more investors away from the non-dividend paying asset.
International spot gold has continued its rout, and on Thursday it extended losses for a tenth straight session, it’s biggest since 1996. Gold was at $1,100 (Dh4,037) an ounce, down $300 from levels seen in 2013.
However, the current rout was triggered after China on July 17 disclosed that their reserves were up by 60 per cent at $1,658 as of end of June, much lower than analysts expectations.
“The [China] news disappointed the market as people thought they had bought more gold because their share of gold of total currency reserves were pretty low,” Carsten Menke, commodity analyst with Bank Julius Baer & Co told Gulf News from Zurich. “On Monday morning, after Asian trading started we had a huge fall in gold price. The speed and magnitude pointed to short selling by hedge funds in Asia,” Menke said.
A more significant technical development was that the sell-off on July 20 was preceded by large redemptions from gold ETFs, almost 504,000 ounces were withdrawn from global gold ETF’s on July 17, the largest one-day decrease since July 2013, said Cesar Perez, Global Head of Investment Strategy, J.P. Morgan Private Bank.
Traders from Shanghai to New York want to know who these mystery sellers were, nevertheless in the backdrop, rising US rates further paints a bleak future for gold.
Higher rates can draw investors toward bonds and away from gold. The prospect of higher rates is also boosting the dollar, and a strong dollar tends to keep a lid on inflation, which also diminishes gold’s appeal as a hedge against rising prices.
“We are seeing improvements in the global economy, and we are heading for higher rates, so it’s not an environment where investors are very keen on buying gold or holding gold,” said Menke.
Even officials at JP Morgan agreed with Menke’s view.
“We believe there will be downward pressure on gold prices in the near future, as from a cost support basis, current prices are still above levels where we believe producers begin considering production adjustments. In an environment where the dollar strengthens and rate rises approach, investors would tend to keep a bearish attitude towards gold,” said Perez. Even Morgan Stanley said that under its worst-case scenario bullion may tumble to $800 an ounce.
No gold in portfolio
“Most clients that we service don’t own any gold in their portfolio as more than two years ago, the Investment Committee decided to sell gold. Those clients who still hold gold see it as an insurance against broader financial market and economic risks.” Menke said. But these investors may be very few. “In terms of risk factors, worries about Greece will remain, but we do not expect a revival of the Eurozone debt crisis as seen four years ago. With regards to the conflict in Ukraine, it will likely continue to linger, but there should be no further escalation. If clients see these as bigger risk compared to us, then it might make sense to have some gold in the portfolio,” Menke added.
Negative on commodities
“We turned bearish on commodities as we saw the first signs of a fading supercycle. Supply growth accelerated in crude oil, iron ore and base metals. We don’t see any supply scarcities and with demand growing rather muted, we advise against holding commodities in the portfolio,” Menke said. About fifteen years ago China’s unfolding industrialisation and urbanisation marked the start of commodity supercyle, at a time of muted supply and demand for commodities. “With China now moving from investment-led growth to consumption-led growth, we don’t think another supercycle will be on the horizon for at least five to ten years.” Menke said.
Bank Julius Baer & Co is overweight on equities particularly Europe and all the money from commodities have flowed into equities.