24/07/2016 05:37 AST
Fatigue is setting in on gold and silver.
Amid the current environment of rising interest rates, and as economic sentiment looks rosy, UBS and other fund managers expect gold prices to consolidate or fall moderately over the next 12 months.
“In the medium term, gold carries with it risks that the Fed will finally signal a rate hike at a time when market expectations are overly pessimistic,” Giovanni Staunovo, an analyst with UBS told Gulf News over email.
An improvement in the economic outlook in the US has sapped demand for the yellow metal. Investors pulled $793 million (Dh2.9 billion) in the week to July 15 out of SPDR Gold Shares, the most since November. A stronger economy is expected to persuade investors to look at riskier assets for better returns, pushing them to riskier assets like equities. Staunovo expects gold prices to fall to $1,275 an ounce, down nearly 4 per cent from current levels, over the next 12 months.
“The chief factor impacting the precious metal is the Fed’s decision about the interest rate hike. Recent data and especially the earning season has stimulated many speculations that another rate hike is back on table,” Aslam, chief market analyst with Think Forex, said in an email, adding “moreover, the BOE [Bank of England] is cherry-picking economic data along with other news to assure the markets that Brexit may not have that much of an impact and this has faded the interest for gold by investors,” Aslam added.
Aslam pegs support at $1,280 an ounce.
Impressive performance
The safe haven metal has already gained nearly a fifth so far in the year. It’s impressive performance has been due to the shift in investors’ expectations around the pace of US interest rate rises and concerns about the unconventional monetary policies implemented by central banks in Japan and Europe.
Natasha Kaneva of JP Morgan also feels that in the short term, gold is vulnerable to profit-taking especially considering the near record high positioning and strong participation from retail investors, who are tactical rather than strategic buyers.
According to the US CFTC data published on July 12, the market was still very long with 304,000 long contracts outstanding, compared to the 147,000 contracts averaged since 2006. But this rally has not been supported by buyers from the world’s largest consuming nations, namely China and India. Imports into India have slumped to around 260 tonnes in the first half in 2016, a drop of 40 per cent, according to research firm Metals Focus. In China, jewellery demand declined 20 per cent year on year in the first quarter of 2016.
Silver, which has outperformed so far compared to gold, may also lose allure.
“ETF (Exchange Traded Fund) and futures/options positions in silver by speculative accounts, which has nearly doubled year-to-date, stand above 120 per cent of mine supply. This extreme increase in investment positions makes the silver a less compelling story,” UBS said.
Silver has gained 37 per cent in the year so far compared to 18 per cent in gold. UBS feels silver should largely mimic gold but with much more volatility – so more short-term upside and long-term downside.
UBS favours other precious metals like platinum and palladium.
“Current positioning (ETFs and futures) is extreme in silver and gold and leaner in platinum group metals (PGMs). We believe PGMs – i.e. platinum and palladium – should trend higher over the coming quarters and are therefore our precious metals of choice,” Staunovo said. UBS is advising clients to invest 60 per cent in palladium, 30 per cent in platinum and 10 per cent in gold.
Gulfnews
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