Anna Golubova Thursday June 22, 2017 18:39
As gold continues to be supported by geopolitical tensions, more hawkish central banks around the world are putting new pressures on the yellow metal, enough to potentially have it end the year below $1,200, says one analyst.
“Our formal forecast for gold sees the precious metal ending the year down at $1183,” global head of market strategy at Westpac, Robert Rennie, told Kitco News in a telephone interview Thursday.
Gold is facing a few headwinds as it begins to trade in the second half of the year, particularly coming from global monetary policy.
“The Fed is clearly on the path to continue to normalize monetary policy. And as we go into July, there will be increased focus on the Bank of Canada, after Senior Deputy Governor Carolyn Wilkins raised risks around a possible hike at its July 12 meeting. On top of that, on Wednesday, the Bank of England’s chief economist Andy Haldane certainly increased the risks of the central bank raising monetary policy rates this year as well,” he said.
Rennie’s comments come as markets continue to digest the Fed’s recent move to raise interest rate by 0.25% and announced plans to shrink its $4.5 trillion balance sheet.
BoC’s Wilkins also gave a “hawkish” speech about Canadian economic growth, hinting of a possible rate hike. “As growth continues and, ideally, broadens further, (the bank’s) governing council will be assessing whether all the considerable monetary policy stimulus presently in place is still required,” Wilkins said in a speech last week.
And BoE’s Haldane said on Wednesday that he was likely to support an interest rate hike later this year. “Having weighed the evidence, I think that the balance of risks associated with tightening -- 'too early', on the one hand, and 'too late' on the other -- has swung materially towards the latter in the past six to nine months,” he said in a speech.
Rennie pointed out that none of these factors are particularly supportive for gold.
“The risks are that the period of weakness in gold could continue. A break down below $1,245 could lead to a fall below $1,230 and a possible retreat further down to as low as $1,210,” he said.
‘Gold is the only safe haven that has really worked this year’
However, Rennie isn’t throwing in the towel just yet, noting that gold has been the only safe haven that has “really worked for investors as a traditional safe haven this year.”
Gold working as a safe-haven asset is bringing in more demand, Rennie explained, adding that it is what kept the prices well supported this year.
“Through 2017 gold has been in a steady uptrend. We started the year below $1,150, we’ve seen gold approaching $1,300 and come back from that level a couple of times (once in April and once in June),” he said. “But, we remain in an uptrend and I think the underlying technical picture and the fact that it is still working as a safe haven has arguably increased short-term demand for gold.”
Rennie, however, is not particularly optimistic that gold could breach the $1,300 level and sustain it, mainly due to the Fed proceeding to normalize monetary policy. He said he projects rate hikes in September and March, and by the end of the year, Rennie expects the Fed to move towards normalizing its balance sheet.
“We continue to think that the current level of activity in the U.S., particularly unemployment and underemployment levels are consistent with approaching full employment, and that should pick up wage inflation,” he said.
There are increasing risks of other central banks beginning to normalize monetary policy as well, Rennie noted.
“If I look at global liquidity and global policy setting, the tide began to turn and I am not sure that really favors a significant move in gold north of $1,300 through this year,” he said.