Alternate investments: Expect pressure on gold to ease in coming months

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Updated: May 15, 2015 12:58:21 PM

GOLD prices hovered around $1,200 an ounce (around R26,000 per 10 gm) in April, with investors looking for cues from the US Fed.

gold gold rateMost US economic data, the key to determine gold price, released last month were dismal, whether it was slower-than-expected hiring, smaller-than-expected gain in US retail sales or slump in new house purchases. (Reuters)

GOLD prices hovered around $1,200 an ounce (around R26,000 per 10 gm) in April, with investors looking for cues from the US Fed. While much of the economic data signalled a postponement of any rate increase, the US Fed, at its policy meet, surprised by holding out an optimistic view. It said the recent US economic slowdown had happened because of transitory factors and that it expected growth to be more resilient.

This view was a blow to those expecting the Fed to wait longer before raising rates, which resulted in gold giving up all gains and closing almost flat for the month.

Most US economic data, the key to determine gold price, released last month were dismal, whether it was slower-than-expected hiring, smaller-than-expected gain in US retail sales or slump in new house purchases.

The existing home sales data were the only bright spot. However, the Fed shrugged off the slowdown evidence as emanating from the ‘transitory factors’. The optimistic view from the Fed, coupled with a drop in unemployment claims to the lowest in 15 years, was enough to convince the markets that the rate hike would happen sooner rather than later.

In the euro zone, the Greek crisis flared up again as it remained locked in negotiations to secure funding and avoid a default. Greek government bonds were set for their worst week since the aftermath of the Syriza party’s election in January. The nation faces payments of almost 1 billion euros due in May. Greece has been struggling to make progress towards releasing financial aid since striking a deal to extend the bailout. Renewed trouble for the euro zone means much more weakness in the single currency, which will boost gold.

One of the major developments for gold over the coming months is likely to be the formation of a broader market consensus on the Fed’s timing of rate increases. After the initial rate normalisation jitters, the environment will likely be far more positive for gold. It is only after that that the markets would shift focus from timing the rate hike to the likely nature and extent of increase. A few Fed officials have already hinted that they anticipate the path to be relatively shallow.

The initial increase in rates will start causing strain on asset markets and threaten the anemic recovery. If there is further moderation of expectations surrounding rate increases, the recent downward pressure on gold should be alleviated. As the market figures out that Fed will stay behind the curve and do little and keep real rates negative for much longer, gold prices should start moving north.

The recent rally in the US dollar amid slowing growth suggests that the greenback gained not due to rising productivity and greater competitiveness, but because of the unprecedented divergence in the global monetary policies and following capital flows.

We reiterate that the main reason to own gold is just the sheer fact that it is one of the best portfolio diversification tools and helps you reduce overall portfolio risk.

The writer is fund manager, Quantum AMC

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