Gold Bulls Stuck Waiting For The End Of Fed’s Rate Hikes - Capital Economics
(Kitco News) - Gold is looking comfortable just under its key psychological level of $1,300 an ounce, said Capital Economics, adding that gold bulls have to wait until the end of Federal Reserve’s tightening cycle before seeing a major price surge.
“The price of gold appears to be well supported at around current levels. As such, we remain comfortable with our end-2018 forecast of $1,300 per ounce,” Capital Economics commodities economist Simona Gambarini said in a note published on Thursday. “The Fed will hike interest rates three more times this year, which intuitively should be negative for gold prices as higher rates increase the opportunity cost of holding non-interest bearing assets.”
Gold is likely to see significant support come in only in the end of next year, added Gambarini, pointing to the Federal Reserve as being one of the main drivers.
“We expect the price of gold to rise to $1,350 by end-2019 when it becomes clear that the Fed tightening cycle has come to an end and that the US economy is facing a cyclical slowdown,” she wrote.
Gold stumbled this week, falling to 2018 lows on Tuesday and breaching its key support level of $1,300 an ounce.
On Thursday, gold was flat, with June Comex gold futures last trading at $1,290.30, down 0.09% on the day.
The yellow metal was pushed down mainly by a jump in U.S. Treasury yields, which were driven by a reassessment of the short-term rates outlook, explained Gambarini.
“We had expected this to happen … We have been forecasting that the gold price would fall for some time now,” she noted.
Capital Economics is not worried about gold dropping any further, highlighting strong support around the $1,290 mark.
“While Fed policy tightening is usually negative for gold prices, higher demand for inflation hedges and a weaker dollar should prevent prices from falling much further this year,” Gambarini said.
Other supporting price factors include physical demand from emerging markets and the U.S. dollar reversal.
“Demand from the two major gold consumers, India and China, has been relatively weak so far in 2018, partly owing to higher gold prices. However, if prices were to stay below $1,300 per ounce for a prolonged period of time some of this demand could come back,” Gambarini said. “The dollar should also come off the boil [over the coming months], which could provide some support to the price of the yellow metal.”