Just a week ago, it looked like a commodity nobody wanted, with fund managers bailing out and analysts all but prophesying its doom on the prospect of five more rate hikes in two years. Now, gold is back above the psychologically important $1,200 per ounce level, seemingly unaffected by the most hawkish Federal Reserve policy in a decade and one of Wall Street’s most breathtaking rallies in a year—factors not usually favorable to bullion.
In Tuesday’s session, Italy’s budget crisis was mainly cited for gold’s rebound from near six-week lows, as Eurozone central bankers and traders sought a safe-haven hedge against a larger regional fallout over Rome's troubles.
Outperforming The Dollar
Even so, some analysts could not help express their wonder at gold’s ability, in recent days, to outperform the dollar, which stands to be the chief beneficiary of the Fed’s planned monetary tightening through 2020.
Rate increases and higher US bond yields dampen the appeal for gold, which offers no yield, unlike the dollar. A higher dollar also makes gold denominated in the greenback costlier for holders of other currencies.
“That gold’s not trading below $1,150 is, I believe, remarkable,” said Frank Holmes, CEO and chief investment officer of US Global Investors Inc, a boutique investment advisory firm in San Antonio, Texas, that recommends gold-linked stocks and exchange-traded funds (ETFs) to investors.
Holmes wrote in a post on Monday that there was “a lot motivating the bears” in gold:
“Besides a stronger dollar and higher interest rate, stocks are still going strong, buoyed by record buybacks, and massive inflows into passive investment products.”
Current Highs Still Behind April
Despite its relative strength of late, gold is still down 7 percent on the year. For instance, its Wednesday start of above $1,211 an ounce in Asian trade pales to the 2018 high above $,1365 seen in April. The dollar, meanwhile, is up 3.4 percent on the year.
That gold fell after April wasn’t surprising as the Fed’s first rate hike for the year occurred that month, followed by another in Jun and the latest in September, where the central bank added a quarter percent point to bring rates to between 2.0% and 2.25%.
The Fed plans another increase in December, three in 2019 and one more in 2020. It has also played down the possibility of undue inflation from these hikes, saying its aim was to “normalize” monetary policy after holding rates at near-zero for nearly a decade since the financial crisis.
Technically Rated A “Strong Buy”
Despite these factors, technical analysts on Investing.com rate December gold futures on New York’s Comex as a “Strong Buy.” Based on their daily technical outlook, the strongest sell recommendations only emerge if a contract reenters the 100-Day Moving Average of $1,230 and the 200-DMA of $1,279.
George Gero, a specialist in precious metals for more than three decades, said gold’s rise with the dollar on Tuesday to recapture its $1,200 perch caught many off-guard. “People were forced to cover shorts and bargain hunters had to enter the market as well,” said Gero, managing director at RBC Wealth Management in New York, a division of RBC Capital Markets.
He said Italy’s budget woes, Venezuela’s meltdown and continued economic troubles in Argentina and Greece all worked in gold’s favor as a safe haven play and inflation hedging tool.
'Unloved Gold' Could Become More Interesting Soon
Christmas and other year-end festivities in the fourth quarter could boost retail demand for bullion as well before the year is over, Gero said:
“After many months of losses, unloved gold at these low prices could become more interesting as the holidays approach sooner than later for some jewelry retailers.”
Bloomberg Intelligence’s senior commodity strategist Mike McGlone said, in an October outlook republished on bullion news site Kitco, that gold and metals will have a hard time recovering if the dollar rally resumes, “but we don't see that happening.”
“It's unlikely the dollar can sustain itself above the 14-year high. Risk versus reward appears to favor metals' longs at current levels,” he said, adding that gold’s upside particularly outweighed its downside risks.
A political surprise, in the form of a Democratic upset win in US midterm elections in November, could also turn into a major support for gold, said Walter Pehowich, executive vice president of investment services at Dillon Gage Metals. “That will put a dent into President Trump’s economic recovery plan and you can expect a serious correction in equities, which will benefit gold,” said Pehowich.
Otherwise, the analyst says his fourth quarter consensus for gold is that it could remain “unloved and uncared, but not hated enough to be cast into oblivion.”