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Gold To Sustain Rally, Test Resistance At $1,400 - Sucden Financial

Kitco News

(Kitco News) - Gold is expected to see a sustained rally on the back of a weakening dollar, overvalued stock markets, and heightening geo-political tensions, according to a report from Sucden Financial.

In the near term, analysts at the international brokerage firm said they see a modest retracement in the yellow metal to $1,320 an ounce before climbing higher to test resistance at $1,400 an ounce, be a multi-year high.

Since its December low at $1,236.50, the yellow metal has rallied 8% following a much anticipated Fed rate hike. The rally coincided with strong upward momentum in equities. However, Sucden Financial doesn’t see growth in the stock markets lasting forever, and a reversal in trends may bode well for precious metals.

The report stated that interest in safe-haven assets like gold could rise as valuations in stocks become increasingly overstretched, particularly when interest rates are rising at a time when global net debt is at $233 trillion, introducing “risk to the world economy.”

 “As stocks continue to achieve record highs, apprehension amongst investors could increase and we may see inflows into gold,” the report said. “The majority of [gold] trading is likely within a $1,300-1,400 an ounce range.”

According to the report, another tailwind for the yellow metal comes from the Phillips curve, or the inverse relationship between unemployment and inflation; traditionally, when employment improves, inflation will increase, and vice versa.

“If demand-pull pressures return, as the PMIs suggest they are, sustained inflation would enhance the likelihood of investors using gold as a hedge,” the report said.

Despite weak physical demand in gold thus far in 2018, Sucden Financial remains optimistic on demand as economic growth and falling unemployment provide supports for the yellow metal.

“We may see an uptick in physical gold demand, be it jewelry or technology consumption,” the report said.

Physical demand was held back in Q4 2017 as lackluster consumption from India, particularly during the Diwali festival, failed to impact the market.

A rally in gold prices since mid-December has also bolstered interest in gold-backed ETFS, as total known ETF holdings rose in October and November to the highest level since 2013 at 71.93 million ounces, and continues to climb into the new year.

“Risk aversion has caused a surge in demand for the yellow metal in the opening weeks of 2018, with known ETF holdings increasing to 72.49 million ounces,” analysts at Sucden Financial said.

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