The consultancy Metals Focus looks for new highs in gold before year end, but nevertheless also cautions that there could be some headwinds first.
The metal hit a six-year high near $1,439 an ounce early Tuesday. Supportive influences include expectations for U.S. rate cuts and renewed tensions between the U.S. and Iran, with the U.S. imposing sanctions.
“While Metals Focus expects further upside, we would caution that near-term headwinds still exist,” the consultancy said in a research note Tuesday. “Even so, the prospects for the gold price appear bright, with gold likely to continue strengthening over the medium term.”
One potential challenge for gold is the potential for a partial recovery in the U.S. dollar in the near term, the consultancy said. Gold tends to move inversely to the U.S. currency. The Federal Reserve has signaled policymakers may cut interest rates, which tends to hurt the greenback. However, so has the European Central Bank, which in turn would hurt the euro against the dollar.
“Second, the outlook of the China-U.S. trade negotiation is, at best, uncertain,” Metals Focus said. “Although further talks are planned for the late June G-20 meeting, the U.S. has already signaled that, should these fail, President Trump will have the ‘legal authority’ to raise tariffs on a further $300 billion of Chinese goods by as much as 25%, which ultimately will weigh on the global economy.”
In the past, trade-war worries have tended to result in a safe-haven bid in the dollar. Further, trade-war worries could hurt emerging markets and thus their currencies, meaning a shift toward the dollar, Metals Focus said.
Metals Focus also commented that market expectations for Federal Reserve rate cuts may have become “overly dovish.” Markets are expecting a cut as early as July, with another one or two reductions before the end of the year.
“While it appears almost certain that U.S. interest rates will end 2019 lower, we believe that investors will be disappointed as the Fed ultimately adopts a more patient approach than currently envisaged,” the consultancy said. “This in turn should be dollar positive, which is likely to create a short-term headwind for the gold price.
“Leaving aside a potential recovery in the dollar, we would caution that the boost from worries about a potential U.S. military strike against Iran will be difficult to sustain. As geopolitical risk premiums quickly unwind, demand for safe-haven assets [is] likely to dissipate.”
However, analysts said they look for conditions to become “decisively more supportive of a higher gold price” later in the year.
“In particular, as the U.S. economy loses momentum (the impact of the 2018 tax cuts fade and the trade wars start to bite), this will feed through into a sharper drop in equities,” Metals Focus said. “Elsewhere, many of the tail risks that have been in place in recent years, that might encourage defensive investments, still remain relevant. These in turn should encourage a pronounced jump in safe-haven demand for a range of assets, including precious metals.
“As such, we expect gold to set new highs before year-end, with these gains extending into 2020.”
