Gold holds firm as US dollar, deflation worry investors

The price of gold has continued to increase even as global equity and commodity markets recover from their early-year rout, which sent bullion soaring as investors scrambled for a safe-haven asset.
Nanjing Night Net

Now, however, it appears a cooling US dollar and negative interest rates in Europe and Japan are the drivers giving gold some firm support. Indeed, in Australian dollar terms, gold may be headed for all-time record highs, say analysts.

Gold, which was trading at $US1061 an ounce at the start of the year, has increased more than 19 per cent to $US1263.60 – back to early-2015 levels but still far below 2011 highs above $US1900.

ANZ commodity analyst Daniel Hynes said the winding back of the cycle of rising interest rate  in the US, coupled with negative bond yields and the risk of deflation in Europe and Japan, had underpinned the strength of bullion.

“Those two issues have sustained the rally in gold and kept prices relatively elevated,” he said.

“In the last few weeks we’ve seen concerns around negative yields in Japan and Europe.”

In Europe and Japan, gold – a non-yielding asset – is more attractive than any assets, such as bonds, that happen to be negatively yielding. Furthermore, deflation increases the value of gold in real terms.

“That’s where the negative-yield play is coming in in those markets,” Mr Hynes said.

“That’s been the biggest driver. Gold is a non-yielding asset, so in a sense it stands up pretty well against those bonds in Japan, for example.”

Furthermore, in the US, inflationary expectations were starting to rise as economic growth maintained a steady clip. That gave further support to gold, a traditional hedge against inflation.

“Inflation-adjusted yields in the US are quite well correlated with the gold price,” Mr Hynes said.

But despite these bullish factors, bullion had probably peaked, he said. ANZ is tipping gold to be at $US1250 at the end of 2016 and $US1350 at the end of 2017.

ABC Bullion chief economist Jordan Eliseo agreed negative interest rates in Europe and Japan, coupled with a cooling US dollar, had underpinned gold.

“In the US there is a clear belief in the market that the Fed won’t be able to follow through on the hiking program that was originally forecast at the start of the year,” Mr Eliseo said.

“That, coupled with negative interest rates in Japan and what’s happening in Europe, has led investors to believe that this era of easy money is clearly not over.

“Therefore it makes sense to own gold as part of an overall portfolio. More and more are saying, well, it makes sense for me to hold 5 to 10 per cent of my portfolio as gold.”

Mr Eliseo said gold, in US dollars at least, would probably consolidate after the gains it had enjoyed.

But in Australian dollar terms, bullion could well reach a record, he said.

Now at $1701 an ounce, Australian dollar gold is within shooting distance of all-time highs of $1800 achieved in 2011.

Mr Eliseo said that, based on US dollar gold reaching $US1350 an ounce, the Australian dollar gold record would be broken.

“In Australian dollar terms, I wouldn’t be surprised to see gold hit $2000 this year,” he said.

This story Administrator ready to work first appeared on Nanjing Night Net.

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