ICBC: Gold Market Due For A Correction
(Kitco News) - While there is still long-term bullish potential, the market is at risk for a pullback as prices have run too far, too fast, according to the world’s largest bank.
Tuesday, in a note to clients, Marcus Garvey, senior manager at ICBC Standard Bank, said that he is particularly concerned with gold as the market is now moving in tandem with interest rates. Historically, rising interest rates are negative for gold as it raises the yellow metal’s opportunity costs.
Gold prices continued to hold near a four-month high as the U.S. 10-year yield pushed to 2.635%, its highest level since mid-2014. February gold futures last traded at $1,339.40 an ounce, up 0.56% on the day.
“It should be noted that gold has diverged from its multi-year correlation with U.S. real rates and even if one believes that we are entering a new market paradigm, as global QE begins to be wound down, the risk of a correction is plain to see,” Garvey said.
One of the reasons gold has been able to buck the trend of higher yields is because of a weaker U.S. dollar. The U.S. Dollar Index fell to fresh three-year lows Tuesday. Garvey said that the greenback continues to look weak as the bond market shows a flat yield curve, with the spread between 10-year and 2-year bond notes at 58 basis points.
However, Garvey added that a lot of that was already priced into the gold market.
“When investors are already expressing that position in interest rate, currency and precious metals markets, it looks like a crowded trade,” he said. “That does not mean the argument is wrong or that markets cannot go further but, on balance, the risk of a correction leads us to urge caution at this time.”
Ultimately, Garvey said that in the near-term, speculative interest in the precious metal has probably risen as high as it can go.
“One cannot escape the fact that investor positioning is now extremely long, making a series of multi-year highs,” he said. “…[I]n the short-term it opens up the market up to the risk of a correction.”
Despite the risk of a near-term correction, Garvey said that he remains optimistic on the gold market for 2018 as the bank expects low inflation pressures to keep the Federal Reserve from aggressively raising interest rates.
“U.S. inflation will continue to undershoot the Fed’s forecasts and that the vulnerability of U.S. consumers to higher real rates will give the Fed pause in its pace of rate normalization. The market’s gradual re-pricing of this should allow gold prices to trend incrementally higher,” he said in his outlook forecast last month.
ICBC, the largest bank in the world by total assets and the most valuable bank in the world by market capitalization, expects gold prices to average the year around $1,312 an ounce.