Standard Chartered: Rate-Hike Worries To Pressure Gold But Downside Limited
(Kitco News) - Gold prices may ease in the near to intermediate term asmarkets factor in Federal Reserve rate hikes in 2018, but the downside should belimited by political uncertainty and trade tensions, according to a report byStandard Chartered.
Later in the year, the metal should draw support from aweaker U.S. dollar and rising inflation expectations, the bank said in aresearch note Wednesday.
The bank projected an average gold price of $1,280 an ouncein the current quarter, before a rally. As of 10:43 a.m. EDT, spot gold wastrading down $5.80 at $1,318.40 an ounce.
Gold may well test the lower end of the recent range aheadof next week’s meeting of the U.S. Federal Open Market Committee, StandardChartered said. Expectations are for another 25-basis-point rate hike.
“Although concerns over trade protectionism and heighteningpolitical tensions have supported gold prices by capping downside risk, thescope for rising interest rates continues to cast a shadow over gold’s upwardmomentum,” the bank said. “Stronger-than-expected data has weighed on prices,but inflationary fears are playing a more dominant role in gold’s pricemomentum.
“Gold prices are trading below their 50-day moving average,but should find support at least initially around 1,300/oz. Physical demand haslimited the downside, but the floor has been reinforced by safe-haven buyingamid heightened uncertainty.”
Analysts pointed out that gold’s recent history shows thatcycle lows have coincided with Fed meetings. Prices have fallen ahead of FOMCmeetings since the Fed hiked in December of 2015. Further, the floor under themarket has risen after each subsequent hike.
“The latest floor was around 1,250/oz after the December2017 FOMC meeting,” Standard Chartered said. “While we would use price dipsaround the March meeting as an opportunity to establish long positions,downside risk could linger as the market shifts from expecting two subsequenthikes to three, in line with our base-case scenario. We expect prices toaverage 1,280/oz in Q2 2018, before rebounding in H2 2018, supported by aweaker USD [U.S. dollar] and rising inflation expectations.”
Gold has a close correlation with the U.S. dollar, movinginversely to the currency. Standard Chartered pointed out that this correlationhas been above 80% in recent sessions.
As for the physical market, Standard Chartered reported thatthere are signs of improvement in otherwise soft demand from India, while buyinghas been “modest” in China.
“While retail demand is weak in India, there are signs thatgold buying has picked up in recent sessions and sentiment towards gold isbecoming more positive,” the bank said. “Contrary to past trends, appetite tobuy has picked up as prices have risen, as consumers have realigned their priceexpectations upwards. However, India’s gold market is trading at a modestdiscount; some regions have seen limited appetite to buy even on price dips.”
The next key gold-buying festival in the world’ssecond-largest gold-consuming nation will be Akshaya Tritiya on April 18.
“Gold premia in China have stabilized in recent weeks, butbuying has been modest,” Standard Chartered said. “The weakness in the jewelryretail sales appears to be slowing, but buying since the Lunar New Year holidayhas been lackluster.”
Meanwhile, the bank reported that after net redemptions of 6tonnes in exchange-traded-fund holdings in February, outflows as of Wednesdaywere 4 tonnes in March so far.
“Holdings have been relatively resilient given that metalheld in trust fell by over 20 [tonnes] in early February amid stock-marketvolatility,” the bank added.
By Allen SykoraFor Kitco News
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