Gold likely to shine for a while

Yellow metal, with 25% gains year to date, has been the best performing asset class

Siddesh Suresh Mayenkar, Senior Reporter
16:46 September 17, 2016

Dubai: Amid signs of risk off sentiment in markets, and with US elections coming up in November, fund managers have a simple message for investors: stay on buying side in gold in case of a price dip.

Gold, which witnessed a sudden turnaround in sentiment in January 2016, has been one of the best performing asset class so far in the year, and expectations are the yellow metal may add more allure in coming weeks and months as uncertainty persists.

Last week, international spot gold traded at $1,320 (Dh4,844) an ounce, up 25 per cent so far in the year. This compares with 11 per cent gains in the MSCI Emerging market index and 3.5 per cent gains on the Dow Jones Industrial Average.

In the next four months, global markets will be bracing for a series of events starting with the US Federal Reserve meeting later this week, followed by US elections in November and another US policy meeting in December. Traders are betting of 85 per cent probability of a 20-50 basis point rate hike when US Fed officials meet on September 20-21.

It would be this uncertainty that is expected to drive gold prices higher along with expectations of weakness in the dollar, which is considered as an alternative to the yellow metal.

Historically, gold has been trading higher following US rate hikes. Between 2004 and 2006, when the fed funds rate climbed from 1 per cent to 5 per cent, gold registered gains of nearly 50 per cent.

“We prefer to stay long in gold with risk of weaker stocks, US election turmoil offsetting risk of a stronger dollar and one or two rate hikes,” Ole Hansen, head of commodity strategy at Saxo Bank told Gulf News. Over the medium term, Saxo Bank expects gold to propel higher towards $1,485 an ounce, if it breaches $1,380.

Even the institutional players have been piling into the yellow metal.

In the week ended September 6, hedge funds and other large speculators boosted their net-long positions in gold futures and options by 17 per cent, the most since June 14, according to US Commodity Futures Trading Commission data.

Lackslutre inflows

Gold Exchange Traded Funds (ETF) holdings remain at a high level but inflows have been lacklustre recently as investors weighed the likelihood of the Fed raising rates. Total Known ETF Holdings of gold stand currently at 64.95 million ounces as against 65.58 million ounces at their highest point of the year in August, Névine Pollini, an analyst with Union Bancaire Privee (UBP) said .

“The demand for ETFs will depend on retail investor sentiment around growth and recovery, particularly in the US and to a lesser extent in the EU. Expected levels could see a further modest increase, but they should still be shy by around 8-12 million ounces,” said Wayne Gordon, commodity, currency, and rates strategist at UBS Wealth Management, who expects gold to be at $1,350 over the long term.

Even the physical demand is relatively absent.

“Higher prices have seen jewellery demand in India and China step back sharply. A better monsoon should lift Indian consumption. However, better Chinese house prices should see domestic interest fade,” said Gordon. China and India consume around half of the world’s mined production of over 3,000 tonnes.

Gold miners

However, share prices of gold miners have been totally disconnected from gold price.

““We would not recommend any gold miner at this point as gold stocks, after the phenomenal run they had since the beginning of the year, have totally disconnected from gold price,” Pollini said.

Generally the overall sentiment in the stock market also gets reflected on miners.

“We see a few hurdles building for gold miners with the current wobble in global stocks not likely to be short-lived. Gold miners profitability has however improved dramatically during the past year so an exposure to the sector given the longer term outlook remains warranted but keep in the mind the overall uncertainty that we see continue in the short term,” Saxo Bank’s Hansen said.