Traders to Stay Bullish on Gold – Inflation to Accelerate Faster than Fed Hikes Rates

Traders to Stay Bullish on Gold - Inflation to Accelerate Faster than Fed Hikes Rates

Traders to Stay Bullish on Gold – Inflation not a flash in the pan

Huileng Tan: A rally in gold prices has room to run on risk concerns from politics to interest rates, so hold on to those long positions, a UBS analyst said Monday.

“There’s plenty of uncertainty out there,” said the bank’s commodity and Asia-Pacific commodity head, Dominic Schnider. Top among consideration is the pace of interest rate hikes from the Federal Reserve, he added.

“Inflation is going to accelerate faster than the Fed is going to hike rates; that’s good for real assets. On top of it, we are looking for weak dollar on broad basis; that combination has a good tendency to boost gold prices,” he told CNBC’s “Squawk Box.”

Gold prices took a beating after U.S. President Donald Trump’s victory but have since rebounded 7 percent this year-to-date. Spot gold was trading around $1,230 an ounce on Monday morning in Asia.

The yellow metal has further upside to $1,300 an ounce, Schnider said.

Federal Reserve chairwoman Janet Yellen will testify on the U.S. economy and monetary policy before the House Financial Services Committee on Wednesday with the market closely watching for any signals of a rate hike. The Fed’s next meeting is on March 14-15. The Fed has forecast as many as three interest rate hikes this year, though debate has grown on the pace.

UBS expects two rate hikes this year because it sees the Fed as cautious until policies proposed such as tax cuts and higher spending actually get legislative nods as currently proposed.

“The economy is expected to accelerate a bit this year versus last year but there’s not going to be an awful lot of acceleration taking place. You can argue Trump is going to able to bring a huge fiscal stimulus and that’s why growth is going to accelerate 4 percentage points. We think that is unlikely to happen; we have yet to see it’s going to pass (the U.S.) Congress,” said Schnider.

“There’s a lot of uncertainty here. For the Fed, in the current environment, this means: ‘yes guys, we are going to normalize rates but it’s going to be slow moving. Give us a little bit of time, let us assess the situation.’”

Why Gold Traders Are Staying Bullish

Frank Holmes:

Strengths

  • The best performing precious metal for the week was palladium with a 4.51 percent gain.  Metal Focus Ltd. reports that palladium supply has been in deficit since 2012 with 2016 marking the widest deficit in six years.  Palladium performed well last year with the boast in auto production in China.
  • Gold traders keep their bullish calls on gold for a seventh week as bullion is trading near three-month high levels due to uncertainty around President Donald Trump and the upcoming French elections. French presidential candidate Marine Le Pen announced her party’s plan to take control of the central bank. She plans to use the central bank to print money to finance French welfare programs and debt repayments after abandoning the euro. Bloomberg reports that since Trump said the dollar is too strong, hedge fund and other money managers have cut their bets on the dollar.
  • Money flows into the largest physical gold bullion ETF accelerated this week to $856 million, almost double the previous week’s inflows.  The largest gold physical gold bullion ETF has also been approved for use in the Islamic Shariah financial system, along with five other gold-related investment vehicles.

Weaknesses

  • The worst performing precious metal for the week was platinum, up just 0.84 percent despite production falling 15 percent in December for South Africa. BullionVault’s Gold Investor Index, which measures the balance of client buyers against sellers, fell to 54.3 versus 55.5 in December. The reading above 50 indicates there are more buyers than sellers, but the level has fallen month-over-month, possibly due to gold’s 5.5 percent price increase over last month.
  • According to data from the People’s Bank of China, the country has not accumulated any more gold for the third month in a row in January. Ole Hanson of Saxo Bank A/S states that China may be reducing focus on gold in favor of its large purchases of currency lately to strengthen the Yuan.
  • A number of money managers who were previously quite bullish after the Trump election have expressed their concerns about Trump’s trade rhetoric, cautioning investors that the “America First” policies hinder global trade, could drive down exporters’ currencies, curb corporate revenue and slow U.S. consumption.

Opportunities

  • Independent Strategy Ltd.’s David Roche says that gold will climb 6 percent through the end of the year. Roche states, “The amount of political risk being created by this new U.S. president and administration is going to create an enormous amount of international tension and uncertainty, and will probably result in a trade war at least with China and possibly other areas.” He notes that he would be more inclined to increase gold’s weighing in a diversified portfolio. Also, Dominic Schnider of UBS Wealth Management sees gold rising to $1,300 per ounce on negative real interest rates.
  • “Miners now are really starting to focus on profitability and cash flow,” says George Cheveley, a fund manager at Investec Asset Management. Randgold Resources announced it will increase dividends 52 percent after a jump in profits, Centamin Plc increased dividends five-fold, and AngloGold Ashanti Ltd. and Gold Fields Ltd. both reported profits. Cheveley states that the mining companies want to produce “good cash-flows and return some of that to their shareholders.” Also, the industry is seeing a resurgence in exploration and mergers and acquisitions, as they recognize the limited mining assets and the declining production output of mines over the next couple of years.
  • Reversing his stance after the election, Stan Druckenmiller, billionaire investor, bought gold again in December and January. “I wanted to own some currency and no country wants its currency to strengthen,” said Druckenmiller, continuing, “Gold was down a lot, so I bought it.”

Threats

  • Uncertainty in the markets seems to be at an extreme, as Bloomberg data shows that frequency of the word “uncertainty” has reached record levels in news stories from multiple sources. In addition, the difference between the CBOE Volatility Index (VIX) and the Global Economic Policy Uncertainty Index is at its highest level on record, indicating more fear in Washington than on Wall Street.
  • Ecuadorean presidential candidate Guillermo Lasso has pledged referendums to prevent mining projects in sensitive areas like Andean wetlands and river headwaters. This would be a reversal from the current president who is looking to implement a number of mining projects.
  • Gina Lopez, the environment secretary in the Philippines, says she will not support any new mining ventures in the country, which is the world’s top nickel supplier. Lopez announced her department will close 23 mines and suspend another five.

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