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'Too Early To Write Obituary For Gold' - TDS

Kitco News

(Kitco News) - TD Securities says gold may suffer more in the near term, but the Canadian bank looks for the precious metal to eventually recover as the U.S. dollar loses momentum and investors look for a hedge amid geopolitical and trade issues.

In fact, the late-Thursday report from TDS strategists Bart Melek, Ryan McKay and Daniel Ghali forecast that gold will average $1,375 an ounce in the final three months of 2019. The report was titled: “Too early to write obituary for gold.”

Gold weakened this month. The strategists said “it is quite possible that we have not seen the bottom yet” since traders have been  ignoring easing U.S. Treasury yields, signs of weaker economic data and a loss of risk appetite. Instead, gold has been responding to a stronger U.S. dollar and technical-chart considerations.

“If price action following the previous ‘death cross’ [on the technical charts] back in late November 2016 is to be a guide, the $1,230s or even lower are real possibilities,” TDS said.

However, strategists said they envision a longer-term recovery in gold since the market is already heavily skewed toward the shorts, or bears, and TDS expects the U.S. dollar to start weakening at some point. Gold tends to move inversely to the U.S. currency, which has been stronger for most of June. TDS also pointed out that U.S. 10-year Treasury yields remain below 3% and trade-war uncertainty is dampening global economic optimism.

Strategists said they also look for many gold traders to start “walking back their somewhat lofty Fed rate-hike expectations.” Gold tends to suffer when the market expects more monetary tightening, and vice-versa.

Strategists questioned whether Fed Chair Jerome Powell will be keen to aggressively hike expectations for higher interest rates during the current monetary-tightening cycle, particularly since “precarious global trade conditions” are creating risks for economic growth and confidence.

“A pragmatic approach on the part of the U.S. central bank, as we approach the end of the U.S. tightening cycle and as most of the other major central banks are in the early stages of policy normalization, should eventually weaken the USD and should be quite supportive of gold,” TDS said.

Further, increased equity-market volatility and geopolitical and trade tensions should boost appetite for gold as a hedge, TDS said. Also, the massive and growing U.S. deficit may prompt a rotation into gold.

“We also think that the negative fallout from Washington's aggressive trade rhetoric will soon bite the U.S. itself,” TDS said. “This should prompt the White House to tone down the aggressive talk, which should ease the downward pressure on EM [emerging-market] currencies that has been a big negative for gold as they slid sharply lower.”

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