Gold: Keeping firm and looking for an upside catalyst – TDS

Key drivers for gold in the form of weaker USD, well contained real interest rates and the Fed funds rate have been supportive for much of this year, but the gold-supportive USD has been offset by the fear that real yields and the Fed funds rates will increase significantly, explains Bart Melek, Head of Commodity Strategy at TDS.

Key Quotes

“As such, the metal is vulnerable to selloffs, as we have witnessed last Friday when it tumbled on massive volume as some $4.2 billion worth was sold — over 30k contracts or around 10% of a normal days' activity.”

“The good news for gold is that an increasing amount of market players are advocating the investment in the yellow metal as a hedge against both market and geopolitical instability. Renewed threats from North Korea's Kim and a confrontational US President are seen as playing a nuclear game of chicken with each other. This, along with an equity market that is priced for perfection are prompting some to seek the safety of gold. On the fiscal side, the likelihood that the US will not be able to pass its oft-cited and promised Tax cut plan in a prompt manner is also helping gold.”

“The lack of fiscal stimulus both threatens equity valuations and increases the likelihood the US central bank will be more dovish that advertised, reducing the cost of holding precious metals. Indeed, as of the end of September, Bridgewater Associates, the world’s largest hedge fund, had increased its holdings in SPDR Gold Shares almost seven-fold, and more than tripled its stake on iShares Gold Trust, a regulatory filing showed. The fund recommended investors consider placing 5 percent to 10 percent of their assets in gold, citing political and economic risks.”

“The combination of a lackluster USD, geopolitics, equity markets that are priced to perfection and low real rates suggest we could see gold attempting to get back to $1,306/oz before the year is out. While much will depend on equities and how the Trump administration is progressing on the tax reform file, the yellow metal could well test the mid-$1,300s if uncertainty grows.”