(Kitco News) – Gold is poised to climb in the months ahead despite another U.S. interest-rate hike on Wednesday and prospects for further monetary tightening, said two banks in research notes Thursday.
“Following the seventh U.S. rate hike this cycle and with the promise of two more before year-end, I see the potential for the gold focus turning more supportive,” said Ole Hansen, head of commodity strategy with Saxo Bank.
Suki Cooper, precious-metals analyst with Standard Chartered, was also upbeat on gold. She commented that the upgrade to inflation projections were modest, and Standard Chartered strategists noted the Fed is deep into a tightening cycle, with limited scope for U.S. rates to move higher relative to the euro zone.
“Gold price risks are skewed to the upside, in our view, despite the hawkish FOMC meeting yesterday,” Cooper said.
Further, Cooper commented that the European Central Bank’s decision to start winding down the bond-buying program known as quantitative easing should underpin the euro in the foreseeable future. Gold has a tendency to move with the euro and inversely to the U.S. dollar.
“FOMC meetings have marked the cycle lows for gold, as prices have softened in the weeks before the meeting, but have tended to recover thereafter,” Cooper said. “We continue to expect gold prices to test five-year highs in Q4 2018.”
Hansen said he looks for the U.S. dollar to run out of steam. He also predicted that the U.S. yield curve will continue to flatten as short-term yields rise while long-end prices stay supported, all due to emerging-market worries and trade wars.
“Even if bond yields move higher, rising inflation expectations may keep real yields range-bound…,” Hansen said.
Hansen and Cooper both cited low bullish hedge-fund positioning as a favorable factor for gold. This recently was near a two-year low, Hansen pointed out. Often when net-bullish positioning is at low levels, market participants see this as a sign that there are potential buyers not currently in the market, and vice-versa. Further, the two analysts also pointed out that gold holdings in exchange-traded funds fell recently.
“In line with previous FOMC meetings, speculative positioning had been scaled back ahead of the June meeting, but positioning was at its lowest ahead of an anticipated rate hike, with the exception of the December 2015 meeting,” Cooper said. “Speculative positioning was lighter than it was ahead of the March FOMC meeting (the latest 25-bps hike) and ahead of the widely anticipated December 2017 hike.”
However, Hansen said, gold needs to clear its 200-day moving average around $1,308 an ounce in order to attract renewed “paper” demand through futures and ETFs.
Spot gold Thursday traded as high as $1,308.90 an ounce, although it backed off to $1,304.40 as of mid-morning. This was still a gain of $5.05 for the day.
“A break above $1,308/oz could see prices initially return to an area between $1,323/oz. and $1,333/oz,” Hansen said.
Meanwhile, Cooper added that yet another potential source of support for gold is a good monsoon season in India. This tends to boost incomes in agricultural areas, in turn meaning Indians living in rural areas have higher incomes to spend on gold.