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A Loss Of Faith In USD Is Propelling Gold To $1,400 - ABN AMRO

Kitco News

(Kitco News) - While many investors are turning to gold because of its safe-haven allure, one international bank says that a weak U.S. dollar is what will continue to drive gold prices higher.

Georgette Boele, coordinator of F.X. and precious metals strategy at ABN AMRO, wrote in a report Wednesday that she remained positive on gold and reiterated her bank’s forecast for prices to push to $1,400 an ounce by the end of the year.

She added that she is paying more attention to gold’s negative correlation with the U.S. dollar than its safe-haven appeal.

“Gold has moved up in an environment of higher equity market volatility and more uncertainty on financial markets, giving the appearance of a classic safe haven reaction,” she said. “However, we strongly believe that the surge in gold prices has happened because of broad dollar weakness rather than safe-haven demand for gold.”

Boele’s comments come after gold prices surged to a more than 3-month high. Although off its session highs, gold prices are still holding substantial gains; August gold futures last traded at $1,334.80 an ounce, up 0.45% on the day.

Looking at the U.S. dollar, Boele said that the currency is suffering because of growing geopolitical uncertainty and President Donald Trump’s “erratic” trade policies. Last week Trump spooked markets by threatening a 5% tariffs on all Mexican imports in an attempt to curve illegal immigration south of the border. If the immigration issues aren’t resolved, tariffs could rise to 25% by October.

“The U.S. dollar is likely also being punished because the U.S.’s longer-term credibility is weakening. This may not be visible in EUR/USD, because the euro has its own challenges, but it is visible versus the Japanese yen, the Swiss franc and gold prices,” Boele said.

The U.S. dollar Index last traded at 97.05 points, relatively unchanged on the day, bouncing off a 2.5-month low

However, gold’s strength is more than just U.S. dollar weakness, Boele said that the metal showed resilient technical strength even before its latest rally as prices held support above the 200-day moving average.

The Dutch bank is also bullish on gold as it expects both the Federal Reserve and the European Central Bank to loosen monetary policy.

“We have adjusted our base case scenario, and now expect the Fed to start cutting the Fed funds rate by 75bp by Q1 2020 (this is currently priced into financial markets). Moreover, we expect the ECB to restart Q.E., and other central banks to become less hawkish – postponing the start of the tightening cycle, or even cutting rates,” said Boele. “An environment of easier monetary policy is in general supportive for gold prices because the interest rate difference – between the currency and gold – declines, making gold as a non-interest paying asset more attractive.”

Boele’s comments reflect aggressive expectations growing in financial markets. The CME FedWatch Tool shows that markets are pricing in a more than 75% chance of a rate cut as early as July. For the year, markets see the possibility of three rate hikes.

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