Precious Metals Weekly – Fed is helping gold

by: Georgette Boele

In this publication: The underlying momentum in gold prices remains strong… as every temporary price weakness is seen as an opportunity. Lower and/or negative real yields are supportive for gold prices. We expect higher prices during the course of 2016.

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Strong underlying momentum

Before the Fed, investors were concerned that gold prices and other precious metals prices had risen too sharply and that prices were no longer in line with fundamentals. The voices came mainly from the direction of participants that were not willing to change forecasts yet and still hold a negative outlook. In general, it is difficult to look at developments in an unbiased way. Often in an information overkill environment, investors have a tendency to look for information that confirms their view. This is called confirmatory bias in behavioural finance.

If we look at gold prices there are some forces one can’t deny
1. Gold prices have broken above their 200-day moving average. In general, this signals a change in longer-term trend. This indicator may not work in a trading range environment but it does do well in case of the start of a new trend.

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2. The frequent heard arguments for lower gold prices are a sharp rally of the US dollar and higher US rates. We think that the multi-year bull trend of the US dollar has come to an end and official rates in the US will only go up gradually. Usually this will be negative for gold prices. However, gold prices will be supported if real yields move lower and/or into negative territory (see graph above).

3. If commodity prices, especially oil prices, continue to rise, inflation expectations for the US could also move higher. For gold bulls this could be an argument to buy gold as a so-called inflation hedge.

4. Every temporary weakness in gold prices quickly runs into a brick wall of support; around USD 1.125 per ounce recently. Meanwhile, the more dovish than expected communication by the Fed has resulted in a sharp recovery in prices. In short, this implies that there is much more upside than downside in gold prices.

5. Other major central banks remain accommodative increasing the attractiveness of gold as investment.

We expect higher gold prices during the course of this year. Taking into account the recent developments, our forecast may even be too conservative.

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