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9th July | Dubai
By Ms. Névine Pollini, Senior Commodity Analyst at Union Bancaire Privée
In June gold fell to its lowest level this year (dropping 2.2%); despite this the metal is up 7.75% year to date, having posted consistent gains since the start of the year apart from some intra-month blips in March and May.
Gold’s performance has recently suffered from the higher USD and rising US Treasury yields, as well as from the continued improvement in global stock market conditions and recently stronger US economic data which has led investors to relocate funds to riskier assets.
As expected, at its latest FOMC meeting, the Fed increased interest rates by 25 bps for the second time this year and Chairwoman Janet Yellen delivered a rather positive assessment of the US economy while indicating that the few disappointing macro data released in early June appears to be only temporary. She guided in favour of further gradual rate hikes, with the proviso that the decisions would be data-dependent. The market is currently pricing in a 46% probability of another rate hike by the end of the year.
Janet Yellen also declared that the Committee will start “implementing a balance sheet normalization program”; she mentioned that it should begin “relatively soon” leading observers to believe it may begin in September or October. The unwinding process will be gradual for the Fed’s portfolio as the amounts of cash and mortgage-backed security redemptions being reinvested will decrease regularly each quarter. This will allow holdings to “continue to decline in a gradual and predictable manner until the Committee judges that the Federal Reserve is holding no more securities than necessary to implement monetary policy efficiently and effectively.” These details were confirmed in the FOMC minutes release on 5 July.
The Fed is by far not the only central bank to adopt a more hawkish tone: global bond yields are rising on the back of expectations of monetary tightening by most central banks, as most of the world’s economies are recovering and getting strong enough to withstand a reduction in monetary policy support. Even though the European Central Bank kept its monetary policy unchanged at its last meeting, Mario Draghi declared that the risks to the growth outlook are now broadly balanced and adjusted the forward guidance slightly. The Bank of England has also hinted at a more restrictive monetary policy. Nevertheless, we believe that since global key rates will rise very gradually from extremely depressed levels, their adverse effect on gold will be limited, especially since inflation in the US and elsewhere remains low, even though the Fed believes that the strength of the employment market will ultimately feed through to inflation.
We are maintaining our prudent view on gold, believing that it will probably remain rangebound, between USD 1,100 and USD 1,300, but we are not ruling out the possibility that gold could be boosted by a variety of factors; chief among them are the continuing uncertainties surrounding the Trump administration’s ability to deliver on its promised pro-growth policies, the recent increase in geopolitical tensions in the Gulf region (Qatar), and the repeated North Korean missile threats.