Gold To Drift To $1,200 By Year-End On Optimism And Fed Tightening — OCBC

Anna Golubova  Monday June 19, 2017 21:22

Gold prices will return to $1,200 in the second half of 2017, as markets embrace a more hawkish Fed amid an improved economic outlook, OCBC Bank said in a report. The bank also cautioned not to rule out geopolitical risks.

Optimism is likely to dominate the second half of the year, as many geopolitical threats didn’t pan out or failed to have a significant impact on the market, wrote OCBC’s economist Barnabas Gan.

“Market-watchers have arguably realized that global economic resilience saw little fragmentation despite the Brexit vote, nor did the US see any clear signs of recessionary indicators post Donald Trump’s election as president, neither did any of the missile tests by North Korea spark any immediate risk of military intervention,” Gan said in the report. “We look for gold to trend to $1,200/oz at year-end.”

Global trade is looking to improve and the Fed is expressing readiness to tighten further, following its most recent rate hike.

“Gold prices have trended lower post the recent hawkish FOMC rhetoric in its last FOMC meeting,” Gan said. “The central bank expects that ‘ongoing strength... will warrant gradual increases in the federal funds rate’, while planning to implement a balance sheet normalization program later this year.”

The Fed’s dot-plot chart indicates a third rate hike later this year, which will put additional pressure on gold prices.

“Given how gold prices reacted from the recent FOMC statement, the yellow metal is slated to fall further into 2H17 especially if US-centric data remains positive, thus fueling further expectations for further rate hike and balance sheet reduction later this year,” Gan said in the report.

OCBC is not ruling out geopolitical tensions, noting that uncertainty is still in the air since it is unclear how a number of key events will play out.

In fact, gold’s 2017 rally was driven by the “onset of risk aversion, led by geopolitical tensions and other growth uncertainties,” explained Gan. “In that light, although we remain bearish on gold prices, we admit that geopolitical tensions are still present to date, especially the ongoing North Korea missile provocations and Brexit negotiations.”

“As reiterated in our previous reports, these factors are highly significant to gold prices, but are also highly unquantifiable, given the many ways these scenarios may pan out, as well as the many differing severity it may take in the months ahead,” Gan added.