Gold Prices Are ‘A Little Too Rich’ For This Analyst
(Kitco News) – This week’s gold gains have been a bit too much for this analyst’s comfort, who says a reversal is in order as the Fed is bound to raise rates one more time this year in what already is a risk-on environment.
“Despite the relatively stronger yellow metal, we think that gold prices may be a little too rich for our comfort,” OCBC analyst Barnabas Gan said in the Weekly Commodities Outlook.
Gan sees gold prices averaging $1,200 by year-end, with gains limited by market expectations of another rate hike this year.
“We still expect the US Federal Reserve to hike its benchmark rate by another 25 basis points and initiate its balance sheet reduction before the year is up,” Gan wrote. “The buoyant global risk-on appetite owing to the strengthening equity indices in the US and Asia, as well as the low VIX level (which touched near record low since 1993 in mid-July), the resumption of yield-chasing behavior should eventually weigh safe haven assets down.
Gold prices posted positive gains this week after nearly hitting $1,280 level and touching a fresh six-week high. On Friday, December Comex gold fell after data revealed that the U.S. economy added 209,000 new jobs in July, appeasing the U.S. monetary policy hawks. The yellow metal was last seen trading at $1,263.70, 0.84% down on the day.
Gan believes that the latest gold rally has been driven primarily by a weak U.S. dollar index, which tumbled to a 13-month low earlier this week.
OCBC Chart
“Given that risk appetite remains buoyant as a majority of economic prints from US, Asia and Europe in the past week have surprised on the upside, the rally in gold prices is chiefly due to dollar fluctuations in the last week rather than a flight to safety,” he wrote.
Yet, despite a conservative forecast on gold, Gan doesn’t rule out further U.S. dollar weakness. “We continue to expect USD vulnerability to persist as other central banks potentially continue to lean against the US Fed,” he added.
In his outlook, Gan also cited lower global gold demand in Q2 2017 as a negative sign, which was revealed by the World Gold Council’s report released on Thursday.
Global gold demand fell 10% in Q2, led mainly by slowing exchange-traded fund inflows, WGC said in its Gold Demand Trends report. But the gold-focused organization remained optimistic, noting that if ETFs are taken out of the equation, gold demand shows healthy signs in other sectors.
The weak ETF figures can’t be taken too seriously, WGC said, noting that quarterly numbers are “skewed” by the really strong inflows going back to 2016.
“During last year’s Q2, gold-backed ETF demand was the fourth largest on record, in part fueled by market uncertainty around the U.K. referendum on EU membership. This has skewed comparisons to what is happening this year in Q2,” Juan Carlos Artigas, WGC’s director of investment research, told Kitco News.
By Anna Golubova
For Kitco News