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Eventual Rate Hikes Will Be Dollar Positive, Gold Negative – CIBC
By Kitco NewsFriday May 1, 2015 8:48 AM
(Kitco News) - Expectation for the Federal Reserve to embark on a new tightening cycle has been pushed now to September, but the fact that interest rates are coming will be positive for the U.S. dollar and negative for gold, according to one major Canadian bank.
In its updated forecasts, the bank is expecting gold prices to end this year at $1,100, and rise to $1,200 by 2016. At the same time, silver is expected to end the year around $15.30 an ounce and then rise to $17.6 by 2016.
Nick Exarhos, senior economist at CIBC World Markets, said in a recent interview with Kitco News, the biggest hurdles gold faces are a stronger U.S. dollar and higher interest rates.
Although the greenback is off its highs from mid-March, Exarhos said that its rally still hasn't played out. The U.S. dollar has taken a hit this week as expectations shift for the central bank's first quarter rate hike. In reaction to, Wednesday’s FOMC monetary policy statement, economists at CIBC said the central bank appears to be less confident about the U.S. economy and the labor market then they were a month earlier.
A more dovish than-expected statement caused CIBC to adjust expectations for the first rate hike to come in September, from its previous forecast of a hike in July.
However, Exarhos added that despite the delay from lackluster growth in the first quarter, the Fed is still expected to hike rates sometime this year and this will ultimately be dollar bullish.
“I think right now the Fed is looking for reasons to hike. Once they do lift off from zero that will be the next kick in the pants, pushing the U.S. dollar higher,” he said.
Of course, Exarhos warned that once the U.S. dollar does top out later in the year, that doesn’t mean there will be renewed potential for the gold market. He added that stabilization and growth prospects in Europe and China will impact gold’s safe-haven appeal.
“There’s scope for the dollar to give ground further out, as policy elsewhere normalizes, but higher interest rates increase the opportunity cost of holding non-yielding assets like precious metals,” he added in a research note published Tuesday.
Although gold will struggle to make gains in the next few years, Exarhos said that they don’t see too much downside for prices. He added that although investment demand will be reduced, gold still fills an important niche.
“Given the global needs to hold other currencies and diversify away from the U.S. dollar, gold still has a role to play,” he said. “I think gold will hold $1,000 but we don’t see a lot of upside above $1,200.”
By Neils Christensen of Kitco News; nchristensen@kitco.com
Follow Neils Christensen @neils_C
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