Commodities Corner
Gold Prices: How High Will They Go?
Gold has advanced smartly in a period of volatile markets. But views different about the yellow metal’s prospects if markets calm.
By Ira Iosebashvili
Gold has defied naysayers with a sharp rally, but the jury is still out on whether the gains will last.
Falling oil prices, careening equity markets, and an economic slowdown in China have spooked investors in recent weeks, leading to fears that the global economy is only steps away from a 2008-style systemic crisis—a perfect reason for investors to jump into havens such as Treasuries, the yen, and gold.
At the same time, investors now believe that there’s virtually no chance the Federal Reserve will raise interest rates again in March, and many even doubt that the central bank will do so by year end. Continued low rates would be good for gold, which pays investors nothing and must compete with yield-bearing investments when borrowing costs rise.
Gold recently traded at $1,230.80 a troy ounce, after hitting its highest level in a year earlier in February. So far in 2016, the metal has rallied some 16%, making it one of the year’s best-performing assets.
The problem, say gold bears, is that the gains are built on panic and are unlikely to last.
It’s “time to sell the fear barometer,” said Jeffrey Currie, Goldman Sachs’ global head of commodities research, in a Feb. 15 report. Goldman expects prices to fall back to $1,100 within three months, as fears of a global crisis ease and investors cut their exposure to assets such as gold, and to drift down to $1,000 an ounce in the next year.
Investors may be overly pessimistic in ruling out rate increases from the Fed this year, says Giovanni Staunovo, an analyst at UBS Wealth Management. He expects the central bank to tighten monetary policy later in 2016, as U.S. economic growth proceeds apace despite market volatility. While short-term volatility may drive gold as high as $1,300 per ounce, the price will settle at $1,200 an ounce in the next 12 months, UBS forecasts.
STILL, THERE ARE OTHER OBSERVERS who argue the fears that prompted people to pile into gold have not yet begun to dissipate. Many are still unsure whether the U.S. economy can stay aloft amid weak global growth, while Europe and Japan have found it difficult to kick-start growth, despite successive waves of economic-stimulus measures.
Exchange-traded funds that buy gold have started accumulating the metal again after a long period of selling, reflecting investor inflows. Holdings at SPDR Gold Shares(ticker: GLD), the world’s largest gold ETF, were up 11% since the end of the year as of Feb. 18, to 713.63 tons.
Gold bulls also point out that expectations of Fed inaction are likely to buffet the U.S. dollar. A weaker dollar, in turn, is good for gold, which is priced in the U.S. currency and becomes more affordable to foreign buyers when the greenback declines. The Wall Street Journal Dollar Index, which gauges the U.S. dollar against a basket of 16 currencies, is down more than 1% in 2016 after two years of gains.
Minutes from the Federal Reserve’s latest meeting, released on Wednesday, showed that the central bank was already growing concerned about the outlook for inflation and growth last month, another point in gold’s favor.
While “the run-up in gold prices is steep and virulent,” any correction “would likely be temporary,” HSBC analysts wrote in a Feb. 11 report. They expect prices to hold “well above” $1,200 an ounce.
Falling oil prices, careening equity markets, and an economic slowdown in China have spooked investors in recent weeks, leading to fears that the global economy is only steps away from a 2008-style systemic crisis—a perfect reason for investors to jump into havens such as Treasuries, the yen, and gold.
At the same time, investors now believe that there’s virtually no chance the Federal Reserve will raise interest rates again in March, and many even doubt that the central bank will do so by year end. Continued low rates would be good for gold, which pays investors nothing and must compete with yield-bearing investments when borrowing costs rise.
Gold recently traded at $1,230.80 a troy ounce, after hitting its highest level in a year earlier in February. So far in 2016, the metal has rallied some 16%, making it one of the year’s best-performing assets.
It’s “time to sell the fear barometer,” said Jeffrey Currie, Goldman Sachs’ global head of commodities research, in a Feb. 15 report. Goldman expects prices to fall back to $1,100 within three months, as fears of a global crisis ease and investors cut their exposure to assets such as gold, and to drift down to $1,000 an ounce in the next year.
Investors may be overly pessimistic in ruling out rate increases from the Fed this year, says Giovanni Staunovo, an analyst at UBS Wealth Management. He expects the central bank to tighten monetary policy later in 2016, as U.S. economic growth proceeds apace despite market volatility. While short-term volatility may drive gold as high as $1,300 per ounce, the price will settle at $1,200 an ounce in the next 12 months, UBS forecasts.
STILL, THERE ARE OTHER OBSERVERS who argue the fears that prompted people to pile into gold have not yet begun to dissipate. Many are still unsure whether the U.S. economy can stay aloft amid weak global growth, while Europe and Japan have found it difficult to kick-start growth, despite successive waves of economic-stimulus measures.
Exchange-traded funds that buy gold have started accumulating the metal again after a long period of selling, reflecting investor inflows. Holdings at SPDR Gold Shares(ticker: GLD), the world’s largest gold ETF, were up 11% since the end of the year as of Feb. 18, to 713.63 tons.
Gold bulls also point out that expectations of Fed inaction are likely to buffet the U.S. dollar. A weaker dollar, in turn, is good for gold, which is priced in the U.S. currency and becomes more affordable to foreign buyers when the greenback declines. The Wall Street Journal Dollar Index, which gauges the U.S. dollar against a basket of 16 currencies, is down more than 1% in 2016 after two years of gains.
Minutes from the Federal Reserve’s latest meeting, released on Wednesday, showed that the central bank was already growing concerned about the outlook for inflation and growth last month, another point in gold’s favor.
While “the run-up in gold prices is steep and virulent,” any correction “would likely be temporary,” HSBC analysts wrote in a Feb. 11 report. They expect prices to hold “well above” $1,200 an ounce.
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