No Ammunition For Fed Rates Hikes Will Be Positive For Gold: ETF Securities

Author: Paul Ploumis
16 Apr 2015 Last updated at 05:06:41 GMT
(Kitco News) - Gold held its own during the first quarter in the face of a stronger U.S. dollar and it’s that resilience that could create some momentum if the conversation about potential interest rate hikes turns to “if” from “when,” according to one analyst.

Tuesday, ETF Securities released its Precious Metals Quarter for the first quarter of 2015. They noted that in the first three months of the year, the yellow metal was relatively flat, losing 0.1% in U.S. dollar terms, compared to a 9% gain in the U.S. Dollar Index.

Looking forward, if it proves that the greenback topped out in mid-March on interest rate expectations, Mike McGlone, head of U.S. research at ETF Securities, wrote that gold could eventually revisit $1,400 an ounce.

He noted in the report that the correlation between gold and the fed funds futures is near its historical highs. In an interview with Kitco News, he said that there is growing outlook that the Federal Reserve will be unable to raise interest rates in 2015.

He added that the Fed has said consistently that potential rate hikes will be data dependent; however, most of the recent data has been much weaker than expected.

"The Fed appears to have relatively little actual inflation ammunition to pull the trigger on rate hikes,” he said. “If things keep going the way they are, it will be clear that the Fed won’t be able to hike rates.”

McGlone added that in an environment of weaker economic data, and an uncertain interest rate outlook, it makes sense to have a more diversified portfolio, which should include a portion of precious metals.

"Investors should be prepared for the potential volatility a Fed misfire might have on financial markets. The [European Central Bank] misfired in 2011 and is now focused on Quantitative Easing (QE). The risk of a Fed rate hike misfire is quite high…," he said.

Silver: The Shining Metal In PM Space

Although McGlone is bullish on gold in the current environment, he is even more positive on silver. In the report he noted that silver gained 6% in U.S. dollar terms in the first quarter.

But even despite these gains, McGlone said silver still looks relatively undervalued.

McGlone added that the investment firm is expecting the gold:silver ratio to fall as it neared 71 at the end of the first quarter. He noted that in December 2014 the ratio was at 78, the highest level since the global financial crisis in 2008.

"The gold/silver ratio is more likely to decline unless prompted by a stumble in the global economy,” he said.

McGlone noted that stronger industrial demand in a low price environment should create long-term potential for the precious metal.

"Lower prices should continue to entice increasing demand for one of the best conductors of electricity,” he said.

Although it is difficult to predict mine supply, as silver is often produced as a by-product, McGlone said that they are expecting to see a strong decline in the “elastic” scrap supply market.

Courtesy: Kitco News