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Keep Bets On Gold, Market Turbulence Is Coming Back - Analyst

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Keep Bets On Gold, Market Turbulence Is Coming Back — Analyst

(Kitco News) - Newly found market stability and increased risk appetite are unlikely to last, according to one long-standing gold bull, who recommends not to overlook the metal.

“The macro backdrop for gold will prove friendlier in 2019 than last year because the degree of U.S. monetary policy tightening seen last year is unlikely to be sustained,” Metal Bulletin precious metals analyst Boris Mikanikrezai wrote in a Seeking Alpha post on Wednesday.

Following a gold rally and a major U.S. equities sell-off in December, the equity space saw a rebound in January, putting pressure on gold prices, which have been trading just below the $1,300 level for the past few weeks.

But, Mikanikrezai sees this equity rebound as a temporary one, citing a technical picture that supports a bear equity market.

“Given the amplitude and the velocity of the U.S. equity rally since the start of the year, I am inclined to think that we are dealing with a technical retracement rather than a sustainable rebound,” he wrote.

And a big part of that bearish picture is the Federal Reserve’s shift to a more dovish stance, Mikanikrezai added.

“Can the pace and magnitude of U.S. monetary policy tightening be sustained this year? Probably not. Otherwise, market turbulence will come back with a vengeance,” he said. “While the Fed has guided the market toward a pause in its hiking cycle, it has also stressed the importance of a flexible approach regarding the unwinding of its balance sheet.”

Most of the downward pressure on gold prices at the moment is coming from the market once again repricing upcoming Fed rate hikes, the note pointed out.

“As the VIX moves further lower, the market feels more confident to re-price more Fed rate increases for 2019, in spite of a strong signal from the Fed that a pause in the hiking cycle could be appropriate,” Mikanikrezai said. “The combination of a stronger dollar and firmer U.S. real rates has exerted some downward pressure on gold spot prices.”

But, despite the headwinds, gold has remained resilient, patiently waiting for a new trigger to take prices higher, the analyst explained.

“Comex gold spot prices are about flat in the year to date. This seems to me that the ETF buying pressure is sufficient to offset the pressure from speculative selling. This is consistent with the fact that the speculative community has started to normalize its overstretched short position since Q4 2018,” he said.

The most likely scenario for 2019 is less rate hikes, weaker U.S. dollar, and higher gold prices, Mikanikrezai wrote.

“The Fed may be induced to alter the magnitude and the pace of its balance sheet’s unwinding in the course of 2019 in order prevent financial conditions from tightening too much and U.S. equities from tumbling,” he said. “The dollar and U.S. real rates are likely to move lower in the coming months, prompting investors to lift their net long exposure to gold. Because gold’s positioning remains quite light, the upside potential for gold prices should not be overlooked.”

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