Gold lacks lustre?

THE improving appetite for risk among investors amid a better global economic outlook does not augur well for gold.

The precious commodity has been under selling pressure lately and is expected to remain so in the coming quarters, as investors shun the safe-haven asset, which does not produce a yield or dividend, in favour of riskier yield-producing assets such as equities.

Gold prices have fallen to a four-month low over the week, with spot gold prices currently hovering around US$1,250 (RM4,013) per ounce.

Analysts attribute the recent selldown in gold to expectations of investors that the European Central Bank (ECB) would cut interest rates to boost inflation and strengthen growth.

Although gold prices recovered slightly after the ECB announced its decision to cut deposit rates below zero, the development is negative gold. The measure, which is meant to stimulate the eurozone economy, could weaken the euro and strengthen the US dollar.

“A stronger greenback diminishes the appeal of gold by making the precious metal more expensive to purchase,” Singapore-based Phillip Futures Pte Ltd commodity analyst Howie Lee says in an email to StarBizWeek.

Besides expectations for the ECB’s stimulus measure, there are also other factors that are denting the appeal of gold as an investment class. These include the strong performance of global equities and the easing geopolitical tensions in Ukraine.

As Lee puts it, the fresh record highs of equities in recent months have enticed investors to rotate their funds into equities from gold, as the latter offers no yield. And with fears of war abating, there is less reason for investors to take refuge in gold. “Barring any escalation in geopolitical tensions around the world, we expect the price of gold to fall as the quantitative easing programme concludes in the United States and investors look forward to an interest rate hike by the US Federal Reserve,” Lee argues.

“We believe gold may fall to US$1,000 per ounce and then trade sideways within a range of US$1,000-US$1,100 thereafter,” he says when asked about his gold price estimate for end-2014.

Volatile environment

Gold prices had rallied at the start of the year, rising around 11% from January to mid-March. The rally was mainly attributable to rising geopolitical tensions between Ukraine and Russia, which drove nervous investors towards gold.

The precious metal peaked this year at around US$1,382 an ounce on March 14 before trending down.

Analysts note that geopolitical tensions as drivers of gold prices tend to be short-lived. When such concerns abate as is the case currently, macroeconomic trends will take over as the main driver of gold prices.

“With macroeconomic uncertainty waning and US Federal Reserve policy unchanged, we think gold will struggle to perform in the coming quarters in the face of rising real interest rates, bond yields and US dollar,” Morgan Stanley Research had said in its February report when gold prices were rallying.

The international investment bank noted that while physical demand for gold from India and China would likely remain robust, the trend would not be enough to offset the major headwinds gold would face in the coming quarters such as rising real interest rates and bond yields in the United States and as well the strengthening of the US dollar.

Morgan Stanley’s base-case projection for average gold prices is US$1,100 an ounce in the fourth quarter of 2014. In the worst-case scenario, the average gold prices could be even lower at US$935 an ounce in the final quarter of the year based on Morgan Stanley’s estimates.

Long-term bear

Societe Generale (SocGen), on the other hand, seems to be a long-term bear for gold. The French investment bank is predicting a gradual decline for the prices of the precious metal over the next two to four years.

While SocGen has recently raised its 2014 price forecast for gold to US$1,272 an ounce from an earlier estimate of US$1,180, it expects prices of the commodity to remain weak in the coming years.

According to SocGen, the US Fed’s determination to maintain its monetary policy towards tapering and gradual but protracted policy normalisation, including rising interest rates as the US economic outlook continues to improve, would underpin the bearish view about the gold prices in the medium term.

“While we have revised higher our near-term gold forecasts, we remain very bearish over the medium and long term,” SocGen says in its recent report.

“Gold is likely to trade well below US$1,200 next year and to break below US$1,000 in 2016 when the US Fed is likely to hike rates at a much faster pace than currently discounted by the market,” it explains.

SocGen foresees gold prices to slide further to average at US$825 an ounce between 2017 and 2019.

For the near term, SocGen believes concern about the political tensions in Europe could sustain gold prices.

Despite wide perception that the geopolitical tensions between Ukraine and Russia have eased, SocGen believes the crisis, which has led to US and European Union sanctions on Russia, would continue to put investors on the cautious side, and spur safe-haven buying of gold, one of the best hedges against uncertainty and for wealth preservation.

BY CECILIA KOK