Gold price: ‘Waiting worse than reality’

The rate hike wait

Mixed economic data out of the US, a weaker dollar, Greek bailout talks on a knife edge and renewed fighting in Eastern Ukraine couldn’t lift the gold price off near one-month lows on Tuesday.

After briefly topping $1,300 an ounce in January gold is now back to its 2015 opening levels of around $1,180 an ounce and down 5% over the past 12 months.

Expectations of a rate hike in the US has been a major factor behind gold’s decline as gold and bond yields have a close negative correlation.

Some analysts go so far as to say that the correlation is so strong that the gold price can be used as a predictor of interest rates, serving as an early warning system of both the direction and magnitude of the move in rates.

The underlying reason for the relationship is that as US yields rise the opportunity costs of holding gold increases because the metal is not income producing.

The expectations of higher rates in the US is also a major factor behind the surging dollar, which despite today’s pullback is trading 19% higher against major currencies than this time last year. Bar the Swiss franc gold has gained in most currencies.

A new report by Macquarie quoted at Kitco News, an Australian investment bank and commodities trader, believes gold could “pivot” when “the market has finally priced-in a Fed rate hike”:

“We now believe September is the most likely data for this, though that is at the latest and we would expect the data to have improved sufficiently in 2Q to finally make investors accept it is going to happen.
As we write this it has not happened so far, indeed some data has been very poor and given gold another run higher. But such sentiment is fickle and could change almost overnight, certainly we expect more robust U.S. data in the next few months,” they added.

“But the waiting will be worse than the reality and we think lower-for-longer global interest rates and still-robust emerging-market demand should allow the gold price to make steady gains in 2H 2015 and 2016,” they said.


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