Gold prices are likely to remain volatile
Higher interest rates and a stronger dollar have push gold futures down almost 6%this year
New York: It would take more than U.S. election upheaval to restart gold’s rally. That’s the view of money managers including Stephen Land of Franklin Templeton Investments, who say concerns that the Federal Reserve will continue raising interest rates will overshadow any short-term boost to haven demand from Tuesday’s midterm vote. The dollar and US-China relations are also likely to reassert themselves as gold catalysts, they say.
The rally in gold, which in October posted its first monthly gain since March, fizzled last week as a resilient dollar and a rebound in global equities undercut demand for the metal. U.S. data on Friday showed hedge funds added to their net-bearish position in futures and options, and the metal on Monday extended its first weekly loss in five.
The election “won’t be the key driver around gold,” Land, the San Mateo, California-based portfolio manager at the Franklin Gold and Precious Metals Fund, said in a telephone interview Nov. 2. “It’s the outcome of the potential trade war with China, the overall health of the Chinese economy and the Fed actions and how that relates to the U.S. and the strength of the dollar.”
Higher rates diminish the appeal of gold, which doesn’t pay interest, while a stronger dollar curbs demand for the metal as an alternative asset. Both forces have helped push gold futures down almost 6 percent this year.
The buoyant greenback has also eaten into demand for the metal as a haven from market volatility, even as the US-China trade war heated up and geopolitical turmoil such as Brexit simmered.
Gold futures rose 1.6 percent in October as global equities slumped. Analysts and traders in a weekly Bloomberg survey were split on the outlook for gold prices amid uncertainty about this week’s vote.
Goldman Sachs Group Inc. said it sees a divided Congress as the most likely outcome of the midterm elections, with Democrats taking the House of Representatives and Republicans keeping a slim majority in the Senate. Luc Luyet, currency strategist at Pictet Wealth Management, says the likely “gridlock” scenario in the U.S. congress may mean the status quo continues and gold remains in a lull.
“Overall, in our base scenario, U.S. growth should remain firm and rates should continue to move up, albeit gradually, weighing on gold,” Luyet said in an email.
The skepticism on gold’s outlook comes even amid signs of nervousness in financial markets. Large speculators have cut their bets that market turmoil will ease, turning net long VIX futures for the first time since May, according to the latest Commodity Futures Trading Commission data. The Cboe Volatility Index rose to an average of 19.35 in October, the highest since the February spike, as global equities sank the most in six years.
After the election, the U.S. economy will still have a strong jobs market, according to Axel Merk, manager of the $135 million VanEck Merk Gold Trust.
“This means the Fed will continue to hike, more so than is currently priced into the markets,” he said in an email Nov. 2. “The price of gold will do what it has been doing of late: gyrate.”
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