Bullish gold likely to be back on driver’s seat

Gold will remain supported by softer US yields and has not looked back since China increased import quota for domestic banks


GOLD price recovered momentum in April as investors bought the precious metal on expectations of fresh demand from China and lower US Treasury yields.

AxiCorp Financial Service Pte Ltd chief global market strategist Stephen Innes said buying took the price of gold to almost US$1800 (RM7,397) a troy oz last week as the market absorbed decent selling.

“Momentum has been driven by a fall in the US yields, but the risk of a more hawkish Federal Reserve next week at the rate decision is too cheap,” he told The Malaysian Reserve (TMR).

The US Treasury yields registered their biggest one-day decline since November 2020 last week, reflecting a renewed demand for government debt after sustained selling.

Innes said while gold will remain supported by softer US yields, and has not looked back since China increased import quota for domestic banks, it is expected to result in five mm troy oz of imports over this month and May.

Elsewhere in the US, gold prices moved up higher this week, hovering below a seven-week peak hit in the previous session, bolstered by a weaker dollar.

Offering a respite to bullion, the dollar index fell to a more than six-week low against rivals, which made gold less expensive for other currencies.

Some investors concluded that gold could be a hedge against higher inflation, but Treasury yields could dull some of the appeal. StashAway co-founder and CIO Freddy Lim said gold is viewed as a protective asset, while providing portfolio insurance against market crashes and offering protection, against the dilution of paper money.

He said this has been particularly relevant in today’s environment where massive monetary stimuli have been introduced by central banks around the world to support their economies against the pandemic.

“Gold demonstrated its purpose as a portfolio hedge and despite the run-up in gold prices, in our most recent re-optimisation in May 2020, we again increased gold allocations across all of our portfolios. The recent surge does not concern us, because we do not treat gold as a trade but as part of the asset allocations within our multi-asset portfolios,” he told TMR.

According to Lim, the demand for gold is likely longer term in nature because it takes economies and society a long time to adjust to the pandemic.

“As such, economic recovery will take time. Central banks will likely need to wait for the recovery to be well established before tightening their monetary policies.”

“Political and economic uncertainty, financial crises, and a large decline in the US dollar doesn’t happen often, but when it does it can cause a sizable short-term loss in a portfolio that isn’t properly prepared with the right risk management tools, such as gold. Ultimately, a strategic allocation to gold will allow your portfolios to remain resilient even in the most extreme and unfavourable market conditions,” he said.

Lim added that gold has a huge potential to remain strong and act as a crucial tool for navigating through the ongoing uncertainties in the markets.

“Back in July 2017, our investment model ERAA or economic regime-based asset allocation, had a long-term fair value for gold at US$2,600 per oz. Today, that fair value has gone up to US$3,000 per oz. With the outlook of the continuous weakening of the US dollar, gold may benefit largely as it has a negative historical correlation to the US dollar,” Lim noted.