Gold seen fighting back as dollar rebound is poised to reverse

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Much maligned gold is set to stage a comeback as the dollar weakens, according to Pictet Wealth Management.

Bullion will climb to $1,320 an ounce by the end of the year, said currency strategist Luc Luyet, which compares with about $1,256 on Wednesday. While trade tensions haven’t yet provided much support, an escalation combined with a slide in the dollar could lift prices, Geneva-based Luyet said on Monday.

Gold has fallen out of favour as investors prefer havens such as the dollar, Treasuries and yen amid fears of a looming trade war.

Gold has fallen out of favour as investors prefer havens such as the dollar, Treasuries and yen amid fears that a looming trade war will damage global growth, hurt earnings and drag down stock markets and other risk assets. Adding to bearish sentiment, the 50-day moving price average dropped below the 200-day on Friday, forming what analysts call a death cross and signalling further losses. Prices are now around the lowest level since December.

“We continue to believe that the dollar has peaked in January 2017, and therefore, the recent strength is some sort of a temporary rebound and we expect further declines down the road,” Luyet said in a phone interview. “Even though it’s not our scenario, if we see higher trade tension, that could at some point be positive for gold,” he said, adding it may lead to lower global growth and increased uncertainty, which are normally positive drivers for bullion.

Other analysts have also been supportive of the metal. Suki Cooper, precious metals analyst at Standard Chartered Plc, sees gold testing five-year highs by the end of the year, implying that prices could rise toward $1,400, while Bart Melek, global head of commodity strategy at TD Securities in Toronto, has said that he expects the metal to start to rebound in the final quarter.

Bullion’s retreat has also been fueled by the Federal Reserve’s hawkish tilt on monetary policy as a booming economy tightens the labor market and raises inflation risks. Hedge funds and speculators last week cut their net-long bets to the lowest since early 2016, while assets in SPDR Gold Shares, the biggest exchange-traded fund backed by the metal, are the smallest since August.

Gold’s decline reflects the positive effect that U.S. tax cuts will have on growth and the dollar as well as rising interest rates, said Luyet. For now, the impact of tax cuts is greater than the potential impact of protectionism, he said.

The Federal Reserve will probably raise interest rates two more times this year, and twice in 2019, while the European Central Bank will likely start tightening in September next year, said Luyet. That should shift the monetary policy divergence in favor of the euro relative to the dollar and be positive for gold in the greenback, he said. He sees gold at $1,350 in 12 months time.

In the nearer term, jewelry demand tends to be relatively strong between August and January because of festivals in India and China, and that should be supportive, or at least limit the downside, said Luyet, who has six years of experience in currencies and precious metals.