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Standard Chartered: Gold Holds Up Despite Dollar Strength, To Average $1,285 In 2Q

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(Kitco News) - Gold prices have held up well despite U.S. dollar strength and are likely to remain range-bound in the coming weeks, averaging $1,285 an ounce in the second quarter, said Standard Chartered Thursday.

A muscular dollar has capped gold’s upside for now, and the precious metal has struggled to benefit from safe-haven flows. Still, the downside is also well supported by the physical market, said the bank in a report by precious-metals analyst Suki Cooper.

“Gold has faced headwinds in recent sessions, but we think gold prices have held up relatively well amid escalating trade tensions and USD strength,” she said. “While some of the price softness has been offset by weaker equity markets, gold has not benefited much from falling UST [U.S. Treasury] yields.”

She later added, “The macro backdrop continues to set the tone for trading gold, but the physical market has provided support on the downside. India’s demand has shown price responsiveness, albeit from lower levels, and central-bank buying persists, with Russia, Kazakhstan, and China continuing to add in April.”

As of 10:17 a.m. EDT, spot gold was up $3 to $1,282.30 an ounce.

In the past, gold has suffered when the Chinese yuan came under pressure amid U.S.-China trade tensions, the analyst pointed out. Recent weakness in the Chinese currency suggests more downside risk for gold. However, the last time the yuan was at current low levels, gold was trading much lower at around $1,200 an ounce, Cooper pointed out.

“This time is different, however. The Fed is not hiking, the physical market has become more price elastic, and central banks remain net buyers,” she said.

The bank looks for the euro to reach $1.12 and $1.15 in the third and fourth quarters, which would be supportive for gold.

“The probability of a U.S. rate cut has risen, helping to support gold prices,” Standard Chartered said. “The market is now pricing in an 82.8% probability of a rate cut in 2019.”

Standard commented that the latest trade data show that Chinese imports have recovered from low levels, while Indian demand has also been stronger. These are the two biggest gold-consuming nations in the world.

“Central banks remain net buyers, with Russia, Turkey, Kazakhstan and China adding to their exposure in April,” Standard said. “China added 14.9t [tones], bringing YTD [year-to-date] purchases to 47.9t. At the current run rate, purchases could reach 150t for 2019.

“Russia added 15t in April, bringing YTD purchases to 70.4t, implying purchases of just over 200t at the current run rate for 2019, slightly below last year’s additions.”

Meanwhile, exchange-traded-product holdings of gold ETP holdings dwindled in May, although the pace of outflows slowed, the bank said. Net redemptions are just under 10 tonnes for the month, bringing 2019 outflows so far to 15 tonnes.

However, Cooper added, “At current price levels, ETP holdings accumulated since the start of 2017 are profitable, assuming the most expensive purchases are redeemed first.”

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