Gold price outlook tied to dollar, equities

When stock markets rise, so does gold, and when they fall, so does gold

By NUR HANANI AZMAN / Pic BLOOMBERG

GOLD value as a safe haven could see it trade between US$1,750 and US$1,775 (RM7,721) an oz this year and edge lower to about US$1,700 at the end of the year as global markets start to stabilise from the Covid-19 shock.

AxiCorp Financial Services Pte Ltd global market strategist Stephen Innes remains bullish on gold due to the level of central bank stimulus and fiscal support coming from governments to combat the weaken- ing in economic activity will lead to a rise in government debt levels.

“The main issue holding back gold in my view is the deflationary aspect of holding gold if the economy turns to depression status. Then investors may need to liquidate gold for general living purposes,” he told The Malaysian Reserve (TMR).

Central banks would then need to stop buying gold, as Russia has already done, to hold on to the much needed US dollar reserves.

“Overall, I expect gold to climb even if equity markets move higher as ultimately the ‘risk-on’ move will cause the US dollar to sell-off. This is the reason I think the next big buying spree for gold will come from a weaker greenback,” he said.

Gold was last traded at US$1,650 a troy oz at press time yesterday.

Bloomberg reported yesterday, gold prices usually move in lockstep are diverging again with an ounce of bullion sold in New York was as much as US$50 more expensive than in London on Tuesday.

The price spread is seen as a measure of the cost to swap futures contracts into gold in its physical form.

Three major processors in the Swiss Canton of Ticino, Europe’s biggest gold-refining hub, are re-opening at a limited rate this week after being shut for almost two weeks.

Still, the higher exchange-for-physical could be due to the fact they are only operating at reduced capacity, according to Innes.

Innes said the cost to swap gold futures to physical products is still high, which suggests the market remains tight.

“A key thing to watch is whether that begins to ease as the Swiss refineries start running again,” he said.

Meanwhile, Oanda Corp Asia-Pacific senior market analyst Jeffrey Halley said gold based on its fundamentals should be priced closer to US$2,000 an oz given the sheer volume of quantitative easing by the world’s central banks over the past two months.

“From a risk hedging basis the same thesis holds as the world economy tumbles into recession from the Covid-19 pandemic,” he told TMR.

He said it may well come to pass, but for now, gold is locked into a direct correlation with the world’s stock markets.

When stock markets rise, so does gold, and when they fall, so does gold, he explained.

“Liquidation or increasing of gold futures positions is for some reason running at 100% correlation. Until such a time as this correlation breaks, or we see total capitulation in other asset markets, gold will struggle to maintain prices above US$1,650 an oz,” he said.