Investors are putting the precious metal as their choice of safe-haven

by SHAZNI ONG / pic by BLOOMBERG

THE price of gold is expected to rise in the second half of 2019 (2H19) as macroeconomic conditions remain supportive of further gains and with investors putting gold as their choice of safe haven, Oversea-Chinese Banking Corp Ltd (OCBC) said.

In a commodity outlook report for 2H19, the Singapore based bank noted the precious metal may rally to US$1,500 (RM6,165) per oz supported by weakening economic fundamentals and a global rate cut cycle.

“Gold rallied 10% in the first half of the year, with most of the gains arriving in June. The stars were aligned for the precious metal to rise, including a fragile global economy, softening global interest rates, a weakened dollar and increasing geopolitical/trade tensions,” OCBC’s economist Howie Lee noted in the report.

The bank does not expect these factors to abate in the near-term and are expected to continue lifting gold prices higher in 2H19.

Lee added the warmongering rhetoric from Iran and the US is starting to sound more aggressive, and makes the US$1,500 per oz price target for gold before the end of 2019 a realistic level based on current trends and fundamentals.

“Multiple trade tensions in the world have taken root while global growth environment remains soft. The US Federal Reserve (Fed) is expected to cut rates to a certain extent — with it, driving yields and the dollar lower, in turn possibly further lifting gold prices,” he said.

Gold price drifting in a narrow range of US$1,270 to US$1,300 per oz in the first months of the second quarter (2Q), before rising to bit US$1,300 per oz before retracing even with the resumption of the US-China tariffs in mid-May.

What arguably drove prices to the current level of US$1,400 per oz and above, was an increased clarity in late May that the Fed was likely to reduce its benchmark rates beginning July.

“With entrenched expectations that the Fed is now going to embark on a rate cut cycle to a certain degree, gold prices are likely to remain elevated unless the Fed fails to deliver on its rate cut expectations,” he said.

Lee said the choice of the safe-haven asset has clearly shifted to gold, with year-to-date (YTD) gains outpacing that of Treasuries.

The precious metal has mostly stayed above its 2018 closing price for most of the year, but for much of the 2Q, the choice of safe-haven assets belonged to US Treasuries (USTs).

“However, with yields continuing to fall, the preferred hedge shifted to gold in late June as the 10-year UST yields sunk to 2%.”

“It is perhaps telling that among the traditional safe havens, most are eking out YTD gains — suggesting that investors remain sceptical of the intermittent risk-on-rallies we have witnessed this year,” he said adding UST yields are the key towards further gold upside.

In the short-run, the bull run on gold prices is likely capped by its relative value to US bonds.

Gold prices have reacted to global market pessimism much later than USTs, with the rally only beginning in late June despite the resumption of China-US trade wars in mid-May, Lee said.

He added this has largely boiled down to USTs presenting a better safe haven alternative to gold, given current yield levels of 2.4 to 2.5% in the early 2Q.

“When 10-year yields withered down to near 2%, investors appeared to have switched favours to non-income yielding gold, resulting in a gold price rally of more than US$100 per oz.

“The spread between gold and a 10-year UST, however, has reached the technical ceiling of US$600 — a level that has not been breached since 2013/14,” he said.

Lee said there is no doubt this level may be breached in 2H19, as this spread reached a high of more than a US$1,000 in 2011, during the peak of quantitative easing programmes in the US.

“While we do not expect similar monetary policies to be enacted during this economic downturn, more troubling signs of economic vulnerability are needed to push Treasury yields down further for gold to gain valuable momentum.

“In the short-term, we expect gold prices to take a breather from its remarkable rally as its value relative to UST’s has reached its technical ceiling. However, the multiple global trade threat and barriers are likely to continue harming business sentiment and disrupt supply chains,” he said.

As economic data continues to deteriorate, the declines in yields and further safe-haven seeking are likely to push gold towards the US$1,500 per oz level Lee noted.

A futures trader at a local brokerage said the upside to gold is capped by the fact that the US economy remains in relatively good shape with high employment and sustained growth.

This would provide support to the greenback and keep investors engaged in US assets at the expense of the further rally in gold.