If the equity market falls further, the highly leveraged gold positions could be the first to buckle again to cover broader drawdowns
by SHAHEERA AZNAM SHAH / pic by BLOOMBERG
GOLD could trend lower should the stock markets and regional currency trading depreciate due to external global factors.
The precious metal declined 0.3% to US$1,856 (RM7,740) an oz (at press time) following hints of interest rates in the US could rise earlier than currently anticipated.
The positive stance was made by Chicago Federal Reserve (Fed) president Charles Evans who said the benchmark rate could increase before the central bank’s inflation target is reached, triggering a rise in the US currency.
AxiCorp Financial Services Pte Ltd chief market strategist Stephen Innes said the strengthening of the greenback would push back gold as a safe haven for investors, waning demand for the investment asset.
“Investors do not like to fight a shift in the narrative, while the US Fed suggesting the US interest rates to move higher before inflation averages 2% and no other push back from the subsequent members.
“One of the gold market’s primary pillars has weakened. With the US dollar re-establishes itself as the go-to safe harbour in stormy seas, gold is falling out of favour,” he said.
He added that if the equity market falls further, the highly leveraged gold positions could be the first to buckle again to cover broader drawdowns.
Gold is expected to take the first hit should the US dollar recover further.
“For the short term, the dollar remains the key since the greenback rebounds coupled with the damage done to many macro trades, it brings attention to the significant amount of leverage in the system, and I think gold was the first leverage domino to fall.
“Still, we need to keep a close eye on the proceedings as we move into early weeks of cover where the chance for a significant risk increases with the US election coming to the fore,” he said.
StashAway co-founder and CIO Freddy Lim believed the precious metal remains an asset of choice in times of uncertainty based on its historical track record as it is negatively correlated to the greenback.
“With the concern of many investors regarding the dilution of paper money from massive money printing conducted by global central banks this year, there has been a rise in demand for gold.
“There is a long road ahead for economies to truly recover from the Covid-19 shock, so you can say demand for gold as a hedging tool is medium to long term in nature,” he said.
Lim added that historically, gold has performed well in low-yield environments with low-interest rates set by central banks, lower risk appetite among investors and high pressure on bond yields.