- Gold range-bound for now
- Gold behaves as risk seeking asset…but it is unlikely that this will continue
Range-bound for now
Since 19 June gold prices have moved within a USD 1,310 to 1,330 per ounce range. On the one hand, the better than expected US data have hurt prices somewhat, while on the other hand, inflation expectations continue to provide support. Investors appear to be very selective in their behaviour. If inflation expectations edge higher, gold prices receive support, while if they cool somewhat gold prices are not hurt. What is interesting to see it that oil prices have moved lower, while these inflation expectations have edged higher. Therefore, they are mainly driven by the increase in upward momentum in the US economy.
Impact of US employment data
Gold prices fell under pressure a few hours before the release of the US employment report. This can be explained by the behaviour of investors who feared a strong US employment report. They were correct in fearing this, because the report surprised on the upside. After the release, gold remained under some pressure until inflation expectations started to edge higher again.
Gold as a risk seeking asset?
Traditionally gold is seen as safe-haven asset. However, there were times that it did not act accordingly. For example, in the risk seeking environment ahead of the global financial crisis, gold moved higher on expectations of higher prices. In addition, the environment of negative real yields makes even gold an attractive investment. Furthermore, at the height of the global financial crisis gold dropped. Recently, the search for yield has not hurt gold prices. Therefore, gold prices were supported while US equity markets have made new highs. This is an unusual combination and can be explained by the following. For starters, as long as the Fed continues to be dovish and signals that higher inflation is just noise, gold will be an attractive investment if real yields are taken into account. Moreover, some investors that fear inflation will also be tempted to buy gold. What is more, the current stance of the Fed has hurt the USD outlook in the near-term, because interest rate expectations remain low. As gold has a strong negative relationship with the US dollar, a weak US dollar is good news for gold. These forces together have resulted in gold behaving as a risky asset. We expect this to be temporary though. We have a more aggressive path of Fed rates hikes for 2015 than the market currently anticipates. In addition, we expect the US dollar to strengthen. The cocktail of higher US rates and a higher US dollar in an environment of positive sentiment will prove negative for gold.
Investors are more constructive
Sentiment on gold and silver has clearly improved. This has manifested itself in a reduction of short positions in both gold and silver, resulting in an increase of net-positioning. Total ETF positions in gold and silver have stabilised. The sentiment in both platinum and palladium remains bullish. The price correction after the strike came to an end was short-lived because the supply outlook remains a concern. Investors continue to hold on to their long positions with full confidence driven by expectations of supply shortages in both platinum and palladium and the improvement in the outlook for global car sales.