Gold: Positive outlook – ABN AMRO

Georgette Boele, analyst at ABN AMRO, suggests that they strongly believe that the surge in gold prices has happened because of broad dollar weakness rather than safe haven demand for gold and remain positive on the outlook for gold.

Key Quotes

“First, the decline in gold prices came to a halt above and relatively closely to the 200-day moving average, and thereafter prices bounced higher. This is a positive development from a technical point of view, and strengthens our case that gold prices will rally towards the end of this year. Our year-end target is USD 1,400 per ounce.”

“Second, the developments on the trade front have decreased the likelihood of tighter central bank policy around the globe. In fact, easier monetary policy is far more likely at this point in time. We have adjusted our base case scenario, and now expect the Fed to start cutting the Fed funds rate by 75bp by Q1 2020 (this is currently priced into financial markets). Moreover, we expect the ECB to restart QE, and other central banks to become less hawkish – postponing the start of the tightening cycle, or even cutting rates.”

“An environment of easier monetary policy is in general supportive for gold prices because the interest rate difference – between the currency and gold – declines, making gold as a non-interest paying asset more attractive.”

“Third, the US dollar is struggling to rally in the current risk-off environment. This is because financial markets fear the policy uncertainty that comes with President Trump’s increasingly erratic trade policy. So, the US dollar is likely also being punished because the US’s longer term credibility is weakening. This may not be visible in EUR/USD, because the euro has its own challenges, but it is visible versus the Japanese yen, the Swiss franc and gold prices.”

“Fourth, we expect the Chinese authorities to step up stimulus to support the economy. It is likely that.”