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Gold To Weaken as U.S. Economy Remains 'Bright Spot' - Gan

(Kitco News) - Although moderately higher so far Monday, gold prices continue to be under pressure and one well-known Singapore-based analyst expects the weakness to continue, downgrading his year-end forecast for the metal.

“Given the weakness seen in gold prices, we revise our 2016 year-end call to $1,200/oz (from our previous estimate of $1,300/oz),” said Barnabas Gan, commodities economist for the Oversea-Chinese Banking Corp., in a report Monday morning.

And this weakness, according to Gan, is expected to spill over into 2017 as well.

“With the likelihood for the Federal Reserve to engage two more rate hikes in 2017, the greenback should turn firmer consequently, and bring gold lower to our 2017 year-end forecast of $1,100/oz,” he said.

Gan explained that gold has been mainly driven by U.S. markets – the U.S. dollar, bond yields and expectations of Federal Reserve rate hikes.

“In the last two weeks, U.S. bond yields have risen by more than 30 basis points across the tenors since the start of November. This is led by reflationary expectations given President-elect Trump’s policies amid the widespread expectation that FOMC will pull the rate hike trigger in its Dec. meeting,” Gan explained.

“All-in-all, the DXY index has strengthened considerably to above its 100 mark, up from a mere 97.1 seen earlier this month.”

Given that rate-hike expectations are much higher now – with markets pricing in a 95.9% chance in December – coupled with higher bond yields and stronger a U.S. dollar, gold has fallen below $1,200 since its election-night peak. February Comex gold futures last traded at $1,188.30 an ounce, up 0.61% on the day.

Despite uncertainties brewing in Europe and Asia, which could propel safe-haven demand for the metal, Gan doesn’t expect these factors to be enough to outweigh the perception of a stronger U.S. economy among investors.

“In short, the U.S. economy still appears to be a bright spot, while the sustained risk aversion, given the issues in Europe and Asia, has left market-watchers moving away from EM assets, which then resulted in fund inflows into the U.S., a scenario that may persist if things stay status quo,” Gan explained.

Source: OCBC Bank

By Sarah Benali of Kitco News; sbenali@kitco.com

 

 

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