Don’t count on US midterms to revive gold

By BLOOMBERG

NEW YORK • It’ll take more than election upheaval to restart gold’s rally.

That’s the view of money managers including Stephen Land of Franklin Templeton Investments, who said concerns that the US Federal Reserve (Fed) will continue raising rates will overshadow any short-term boost to haven demand from yesterday’s midterm vote. The dollar and US-China relations are also likely to reassert themselves as catalysts, they said.

The rally in gold, which in October posted its first monthly gain since March, fizzled last week as a resilient dollar and a rebound in global equities undercut demand. US data last Friday showed hedge funds added to their net-bearish position and the metal was little changed early yesterday before the vote.

The election “won’t be the key driver around gold”, Land, the San Mateo, California-based portfolio manager at the Franklin Gold and Precious Metals Fund, said in a telephone interview last Friday. “It’s the outcome of the potential trade war with China, the overall health of the Chinese economy and the Fed actions and how that relates to the US and the strength of the dollar.”

Higher rates diminish the appeal of gold, which doesn’t pay interest, while a stronger dollar curbs demand for the metal as an alternative asset. Both forces have helped push gold futures down almost 6% this year.

The buoyant greenback has also eaten into demand for the metal as a haven from market volatility, even as the US-China trade war heated up and geopolitical turmoil such as Brexit simmered. Yesterday, VP Wang Qishan said Beijing remained ready to discuss a trade solution with the US, but cautioned the country wouldn’t be “bullied and oppressed”.

Gold futures rose 1.6% in October as global equities slumped. Analysts and traders in a weekly Bloomberg survey were split on the outlook for prices amid uncertainty about this week’s vote. Yesterday, futures were steady at US$1,231.40 (RM5,172) an ounce, after easing 0.1% on Monday.

Goldman Sachs Group Inc said it sees a divided Congress as the most likely outcome of the midterms, with Democrats taking the House of Representatives and Republicans keeping a slim majority in the Senate. Luc Luyet, currency strategist at Pictet Wealth Management, said the likely “gridlock” scenario may mean the status quo continues and gold remains in a lull.

“Overall, in our base scenario, US growth should remain firm and rates should continue to move up, albeit gradually, weighing on gold,” Luyet said in an email.

The scepticism on gold’s outlook comes even amid signs of nervousness in markets. Large speculators have cut their bets that market turmoil will ease, turning net long VIX futures for the first time since May, according to the latest Commodity Futures Trading Commission data.

The CBOE Volatility Index rose to an average of 19.35 in October, the highest since the February spike, as global equities sank the most in six years.

Fed chairman Jerome Powell and his colleagues are expected to hold policy steady at a two-day meeting that starts today, right after the US vote, while leaving the door ajar to a rate increase at their final gathering of 2018. So far this year, the Fed has raised rates three times.