Gold Weaker After Strong Start To The Year
The price of gold has risen over 11% this year, driven mainly by USD weakness on reduced expectations of aggressive Fed tightening and the absence of growth-driving policy implementation by president Trump. However, despite their strength over the year, the last three months have seen gold prices steadily retreating as the market has once again started to build US rate hike expectations heading into the Fed’s December rate hike.
Looking ahead to the new year it is likely that gold will remain pressured as a combination of stronger momentum in the US economy and higher US rates keep the USD supported. Furthermore, the tide seems to be shifting in global central banks with some in the G10 space, such as the BOC and BOE, having moved back into tightening mode and others on the cusp of doing so. The removal of accommodating monetary policy should exert downward pressure on gold as a zero-income asset.
Positioning in gold also poses the risk of lower prices as, although long positioning is not extreme, it is at a high enough level that profit taking and position squaring will lead to a deeper move.
JP Morgan Advise Clients to Sell Gold
Analysts at JP Morgan have said to traders in their 2018 outlook that; their advice is to stay short with gold into the end of 2018 “given solid economic growth, a possible bottoming out in inflation and the potential further Fed repricing in 1H18, US real rates should rise in 1Q and 2Q, thus pushing prices lower”.
The investment bank added that “precious metals prices should stabilize mid-year and move higher into 2H on the assumption that; given the aging US cycle, the US economy might become increasingly vulnerable to further rate hikes, ultimately pressuring real rates lower as the Fed potentially takes a pause.”
JP Morgan currently forecast five more Fed rate hikes between December of this year and December of next year. Adding that; as we believe gold rallies on the back of US real yields potentially stagnating in 2H18, we see even greater upside potential in silver, given its historical tendency to outperform gold during outsized rallies”.
Citi Cite Upside Risks
However, there are upside risks to the gold outlook. Rising geopolitical tensions in the Middle East as well as between the US and North Korea have kept fueling a visible safe haven bid in gold at times. This looks to be a dynamic set to continue given the on-going rhetoric from both countries.
Analysts at Citi bank have said that they foresee a “new normal” in gold, where prices are likely to remain supported due to increased geopolitical tensions. In a report released to traders this week the investment bank said that gold prices are likely to “push north of $1,400 per ounce for sustained periods through to 202”. Citi cite elections, political votes, military conflicts as well as macro crises as being the likely reasons why gold will stay supported.
Citi said that “Event-driven bids for gold seem to be occurring more frequently and may be the new normal… In short, even as the rates and forex channel dominate the outlook for gold pricing, the yellow metal is increasingly being used by investors as a policy and tail risk hedge,”
Gold is currently challenging the 61.8% retracement from the 25th June low which has proved strong support so far. The rising trend line from December lows is also adding support so for now, the current range looks set to continue. A break of the 1260.78 level should pave the way for a deeper move down to the 78.6% retracement and beyond that, the next key structural support level will be the June low around 1205.68.