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Metals Focus: Gold 'Relief Rally' Not Over But Headwinds Persist

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(Kitco News) - The consultancy Metals Focus says gold’s recent “relief rally” has more room to run and could carry the metal over $1,300 an ounce in the months ahead, yet analysts also do not project a sustained rally over the next year due to a number of potential headwinds.

Spot gold hit a three-month high just below $1,242 an ounce Friday, continuing a rally from a series of daily lows in the $1,180s during September and August trough of $1,160.75. The move was initially fueled by a softening of the U.S. dollar, before drawing investor interest as global equities sold off during October.

Additionally, gold was helped when traders with short, or bearish, positions in the futures market began buying to exit from those trades, Metals Focus said in a report Monday.

“Looking ahead, we believe that the relief rally that gold has enjoyed still has some way to go,” Metals Focus said. Analysts cite potential for still more short covering, as well as potential for fresh buying, with gross longs far below the January peak.

The macroeconomic backdrop should also support gold for a while, since trade-war worries have abated some, equities are less lofty and financial markets have already priced in an expectation that U.S. interest-rate hikes to continue for the next year.

“As such, we would not be surprised to see a breach of the $1,300 mark before the end of the year, with a peak in the mid-$1,300s plausible during the first quarter of 2019,” Metals Focus said. “Beyond that though, it is hard to see gold being able to sustain an uptrend.”

Thus, while the consultancy might look for higher prices in the long term, analysts said there are still a number of headwinds for the medium term.

“First, even if priced in, the backdrop of rising U.S. interest rates, coupled with policy rates across other reserve currencies remaining low, will continue to weigh on professional investor interest in gold,” Metals Focus said. “Meanwhile, the health of the U.S. economy seems likely to be sustained, at least over the next six [to] 12 months, and this should perpetuate mainstream investors’ commitment to U.S. equities and limit the appeal of safe-haven assets like gold.”

Further, worries about European economic growth and political risks may underpin the U.S. dollar, thereby providing another headwind for the yellow metal due to the inverse relationship between the two markets, the consultancy continued.

“Simply put, the argument for rotating into the metal will be hard to make, given this unsupportive macroeconomic backdrop and arguably better opportunities elsewhere, notably equity markets,” Metals Focus said.

“This should in turn see a return to such range-bound conditions as we had seen for much of the first half of 2018. As a result, Metals Focus’ projections over the next 12 months for the gold price see it fluctuate in a $1,200-1,360 range, averaging around $1,300 over the period.”

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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