Gold glitters in flight to safety but rally not expected to last

SINGAPORE - Investors are buying more gold as its status as a safe haven gains traction again, though analysts believe that the yellow metal's glowing start to the year is not expected to last.

Once the shock of market volatility of the past few weeks wears off, investors' focus will probably return to a further rise in US interest rates, which would prove negative for gold prices, they say.

UBS commodities analyst Wayne Gordon said: "The path of resistance is down for gold in the short term."

With investors seeking safety in gold amid the floundering of the global markets since the new year began, the gold spot price has gained 4 per cent and was trading at around US$1,104 (S$1,579) an ounce on Monday; before that, it had fallen about 10 per cent from its last peak in October.

Brian Lan, managing director of gold dealer GoldSilver Central, said: "Property and stock markets are not doing well, so people are looking for alternative sources of investment. There's no other asset class that people have faith in at the moment."

Even a rebound in global equity markets, a rally in the US dollar and lower US yields late last week failed to dim the lustre of gold, said analysts.

HSBC analysts James Steel and Howard Wen said: "Normally, such a powerful bearish cocktail would be expected to push gold significantly lower."

Yet, gold has held near US$1,100 an ounce, they noted. "Gold's ability to largely shrug off these developments is impressive."

The movements of the gold price so far this year mark the metal's re-emergence as a safe-haven asset; tumultuous events such as the Paris attacks in November had not triggered a reaction in the gold price, leading some to speculate that investors no longer believed in using gold as a hedge against risk.

Societe Generale analyst Robin Bhar said the lack of reaction was rooted in gold being largely "at the mercy" of market talk around a potential rise in interest rates and increasing US dollar strength. The rise finally took place in December.

"With the buzz of the Fed's first interest rate rise in almost a decade behind us, the gold price has, temporarily in our view, brandished its characteristics as a risk hedge," he said.

In the near term, further financial market volatility, ongoing macroeconomic risks and physical demand from China ahead of Chinese New Year could lend some support to the gold price, analysts believe.

Hedge funds more than doubled their net-long position in gold last week, with investor holdings of gold through exchange-traded products increasing at the fastest clip in a year, Bloomberg reported. Some US$926 million have been put into exchange-traded funds backed by precious metals so far this year.

Citigroup last week raised its 2016 forecast for the gold price by 7.5 per cent to US$1,070 an ounce; it expects ongoing global macro concerns to support the gold price this quarter. Still, the gold price is unlikely to go beyond US$1,140 an ounce, said Phillip Futures investment analyst Daniel Ang.

"There's a very strong resistance on that level - it's very likely people will take profit or start to sell gold," he said. "There aren't many fundamental reasons for it to be so high."

Beyond the impact of general market uncertainty, expected increases in the US interest rates would probably dominate market rhetoric on gold, analysts said.

The US Federal Reserve will hold its first meeting on Wednesday, but analysts are not pencilling in any interest rate increase from that. They point instead to the March meeting as the next key event to watch for gold.

UBS commodities analyst Wayne Gordon told The Business Times: "In the short term, gold is trading a Fed story." The bank is expecting four rate hikes this year, with the first one to occur in March - contrary to what the market is increasingly pricing in.

The gold price could potentially drop to as low as US$985 an ounce, UBS said in a note. In the longer term, however, it expects gold prices to climb again in the second half of the year, supported by Fed rates that would rise more slowly than inflation in the US, leading to negative real interest rates. Demand from Asia would also be "robust", he said.

Citigroup, on the other hand, expects a stronger US dollar to exert pressure on the gold price. It said: "We continue to expect the gold's inverse USD relationship to hold sway as the year progresses, maintaining a downward trajectory in the yellow metal's prices."

This article was first published on Jan 26, 2016.
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