 | Get all the essential market news and expert opinions in one place with our daily newsletter. Receive a comprehensive recap of the day's top stories directly to your inbox. Sign up here! |
(Kitco News) - Investors looking to speculate in gold will need to be nimble as the fundamental drivers within the marketplace remains fairly nuanced, according to one market analyst.
In an interview with Kitco News, Huw Roberts. head of analytics at Quant Insight said that although gold prices below $2,000 are slightly undervalued according to his firm’s modelling, there is still little conviction in the marketplace.
He added that this is a continuation of the “wait-and-see” sentiment that has been plaguing the precious metal in the last few months.
The neutral outlook comes as gold prices hold in neutral territory around $1,970 an ounce after bouncing off of three-month support level at $1,939 an ounce. Gold prices saw some solid selling pressure after the Federal Reserve left interest rates unchanged on Wednesday but signals that it could still raise interest rates two more times this year.
Roberts said that according to QI’s modelling, the biggest factor driving broader financial market landscape, including gold, is interest rate volatility. Specifically for the precious metal, for gold prices to go higher, interest rate volatility has to ease.
“At the moment on our model shows gold is trading more like a pro-cyclical asset rather than a safe haven,” he said. “The macroeconomic outlook right now is inherently complex. You can't just say lower real yields, higher gold; lower dollar, higher gold.”
As to what is driving interest rate vol, Roberts said the growing worry is about the supply of bonds in the marketplace. He added that whether the Federal Reserve raises interest rates two more times or leaves them at current levels, is of very little concern to markets. He added that the U.S. central bank is close enough to its terminal rates that the Fed’s path is no longer a significant macro force in the broader landscape.
According to QI modeling, interest rate volatility is being driven by supply concerns and growing debt levels in a higher interest rate environment. At the start of the month Congress managed to resolve its months-long debt ceiling crisis; however, the government now needs to issue more debt to refill its coffers. Some reports have said that the government will have to issue around $1 trillion in Treasures in the next few months.
“If you get an unruly bond market. If there's a kind of supply glut and digestion is a problem, and you see interest rate, vol rise, that is a big pain for equity markets, but also for gold prices as well, according to our modelling,” he said.
|
| Gold remains a strategic asset to hold as the Federal Reserve maintains its hawkish stance - World Gold Council's Cavatoni |
Although Quant Insight remains neutral on gold, Roberts said that there are potential risks events that could bring gold’s safe-haven allure back to the market.
With the broader environment, Roberts pointed out in the short-term gold remains sensitive to credit spreads. He added that if credit spreads start to widen because of economic fears, gold could attract some bullish attention.
At the same time, Roberts said that QI modeling also suggests that equity markets are becoming overvalued as market conditions turn neutral to negative.
“Conditions are still positive but where prices are this is a red-flag moment to keep an eye on,” he said. “If you had to get off the fence, you could take a small long position in gold. But right here, right now, because the picture is so nuanced, we don't have a big strategic buy or sell signal.”
