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Standard Chartered: Rate-Hike Worries To Pressure Gold But Downside Limited

Kitco News

(Kitco News) - Gold prices may ease in the near to intermediate term as markets factor in Federal Reserve rate hikes in 2018, but the downside should be limited by political uncertainty and trade tensions, according to a report by Standard Chartered.

Later in the year, the metal should draw support from a weaker U.S. dollar and rising inflation expectations, the bank said in a research note Wednesday.

The bank projected an average gold price of $1,280 an ounce in the current quarter, before a rally. As of 10:43 a.m. EDT, spot gold was trading down $5.80 at $1,318.40 an ounce.

Gold may well test the lower end of the recent range ahead of next week’s meeting of the U.S. Federal Open Market Committee, Standard Chartered said. Expectations are for another 25-basis-point rate hike.

“Although concerns over trade protectionism and heightening political tensions have supported gold prices by capping downside risk, the scope for rising interest rates continues to cast a shadow over gold’s upward momentum,” the bank said. “Stronger-than-expected data has weighed on prices, but inflationary fears are playing a more dominant role in gold’s price momentum.

“Gold prices are trading below their 50-day moving average, but should find support at least initially around 1,300/oz. Physical demand has limited the downside, but the floor has been reinforced by safe-haven buying amid heightened uncertainty.”

Analysts pointed out that gold’s recent history shows that cycle lows have coincided with Fed meetings. Prices have fallen ahead of FOMC meetings since the Fed hiked in December of 2015. Further, the floor under the market has risen after each subsequent hike.

“The latest floor was around 1,250/oz after the December 2017 FOMC meeting,” Standard Chartered said. “While we would use price dips around the March meeting as an opportunity to establish long positions, downside risk could linger as the market shifts from expecting two subsequent hikes to three, in line with our base-case scenario. We expect prices to average 1,280/oz in Q2 2018, before rebounding in H2 2018, supported by a weaker USD [U.S. dollar] and rising inflation expectations.”

Gold has a close correlation with the U.S. dollar, moving inversely to the currency. Standard Chartered pointed out that this correlation has been above 80% in recent sessions.

As for the physical market, Standard Chartered reported that there are signs of improvement in otherwise soft demand from India, while buying has been “modest” in China.

“While retail demand is weak in India, there are signs that gold buying has picked up in recent sessions and sentiment towards gold is becoming more positive,” the bank said. “Contrary to past trends, appetite to buy has picked up as prices have risen, as consumers have realigned their price expectations upwards. However, India’s gold market is trading at a modest discount; some regions have seen limited appetite to buy even on price dips.”

The next key gold-buying festival in the world’s second-largest gold-consuming nation will be Akshaya Tritiya on April 18.

“Gold premia in China have stabilized in recent weeks, but buying has been modest,” Standard Chartered said. “The weakness in the jewelry retail sales appears to be slowing, but buying since the Lunar New Year holiday has been lackluster.”

Meanwhile, the bank reported that after net redemptions of 6 tonnes in exchange-traded-fund holdings in February, outflows as of Wednesday were 4 tonnes in March so far.

“Holdings have been relatively resilient given that metal held in trust fell by over 20 [tonnes] in early February amid stock-market volatility,” the bank added.

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