Gold is at risk of taking a tumble as a resurgent dollar erodes demand with the Federal Reserve opting for not one, but two rate increases before the year-end, according to UBS Group’s wealth-management unit, which forecasts that bullion may drop back to $1,150 an ounce.
“Definitely, second half of the year, we’re going to get two hikes – that’s not fully priced in, and that’s why most dollar strength’s to come,” Dominic Schnider, head of commodities and Asia-Pacific foreign exchange at the unit in Hong Kong, said in an interview on Bloomberg TV. Gold, which traded at $1,229.79 yesterday, was last below $1,150 in February.
Gold’s been in retreat this month, paring a gain since January, as US central bank policy makers have stepped up a drumbeat of commentary that the first rate rise of 2016 may come either as soon as next month or possibly in July, buoying the dollar. UBS’s Global Asset Management Head of Asia Pacific Rene Buehlmann said last month that as bullion offers no yield, it doesn’t add value to investors’ portfolios in the long run. Schnider also highlighted poor physical demand for bullion in the interview.
“Some people are going to get caught on the wrong side,” Schnider told Bloomberg’s Angie Lau. “Gold is going to roll over, we’re going to fall back to $1,150, and so be ready for more weakness in the short-term.”
Bullion for immediate delivery rose as much as 0.8% on Thursday, snapping a six-day losing run, the longest since November, according to Bloomberg generic pricing. While the metal sank to the lowest since April 6 on Wednesday, it’s still 16% higher this year as investor holdings surged.
The odds of a US hike next month have risen to 34 percent, up from 12% at the end of April, and the chances of a move by July are now better than even, Fed Funds futures show. The dollar has risen too, with a gauge of the US currency headed for the biggest monthly gain since January 2015.
Not everyone sees a retreat in bullion. Citigroup raised its year-end target by $100 to $1,250 an ounce, according to a report this week. While prices have fallen this month, that may provide an opportune moment to “buy-the-dip,” Citigroup said in the report that forecast commodities had turned a corner.
Gold’s garnered plenty of backers as it rose this year, with central bankers in Japan and Europe pressing on with negative rates. Hedge fund manager Paul Singer said in May that gold’s best quarter in 30 years is probably just the beginning of a rebound as global investors - including Stan Druckenmiller – weigh the ramifications of unprecedented monetary easing.
Still, in the US plenty of Fed officials have gone on record in the past two weeks to press the case for higher borrowing costs as the economy strengthens. On Monday, the San Francisco Fed’s John Williams said two to three increases this year are still “about right,” and last week, New York Fed President William Dudley said a June to July time frame for a hike was reasonable. Fed Chair Janet Yellen is due to speak today.