The Bears Are Back As Gold Prepares To End Worst Month in Nearly 3 YearsBy Kitco News
Wednesday November 30, 2016 12:11
(Kitco News) - Gold is seeing its worst monthly decline in nearly three years as prices drop more than $100 in November, reacting to a strong U.S. dollar and higher bond yields.
February gold futures last traded at $1,175.70 an ounce, down 1.27% on the day.
One international bank expects that any rally in gold will eventually generate new selling pressure as investors continue to unwind bullish position established since the start of the year.
“The net long positions in the futures market and in ETFs have been reduced but overall positions are still large. In the current environment we expect investor position liquidation to continue leading to a cutback in net-positions in the futures market to an average level of 100,000 contracts and also a considerable cutback in total ETF positions,” said Georgette Boele, coordinator of FX and precious metals strategy at ABN AMRO in a recent report.
Looking to next year, Boele said that she expects the current environment of a stronger U.S. dollar and higher bond yields to weigh on gold. The Dutch bank is expecting gold prices to fall to $1,100 an ounce by the end of next year.
While unprecedented investor demand drove prices to one-year highs at the start of the year, Boele warned that there is little reason for investors to continue to hold gold.
“For a start, rising inflation expectations are more than countered by the rise in US Treasury yields and expectations about upcoming rate hikes by the Fed. As a result, US real yields are rising which is a major negative for gold prices,” she said. “What is more, the last leg of a powerful rally in the US dollar is in full swing. This is a powerful cyclical rally where higher US equities, expectations of more Fed rate hikes and expectations of a strong uplift in the US economy drive the US dollar. This is being reflected in the portfolio inflows into US equities and cyclical bonds. Investors will find zero-income paying asset gold and other precious metals unattractive because of higher income in equities and bonds.”
While lower gold prices could help stimulate industrial and jewelry demand, Boele said that these sectors will not be enough to support the market and only “dampen the size of the move down.”
While ABN AMRO is negative on gold in 2017, the bank is a little bit more optimistic for 2018, expecting that prices could eventually push back to $1,300 an ounce.
“We expect the US dollar to peak in 2017 and to weaken considerably in 2018. This is good news for gold prices as well as 10y US real rates will likely also peak and move lower. All together this should give an incentive for investors to position in gold again,” she said.
Turning to silver, Boele said that a weak gold market is expected to weigh on the grey metal with prices expected to fall to $15 an ounce next year.