Fresh demand for gold | The Star

PETALING JAYA: Geopolitical tensions and expectations for an interest rate pivot by the US Federal Reserves (Fed) to occur by early next year, will help keep the price of gold elevated despite the potentially weaker demand from China.

Analysts said the precious metal would remain a beneficiary of the de-dollarisation buying by many central banks as the talk of a new “cold-war” between the West and China/Russia fuelled the push to cut reliance on the US dollar and diversify foreign reserves.

OANDA Asia Pacific Pte Ltd senior market analyst Kelvin Wong said the current tensions between the United States and China are likely to persist in the short to medium term as reflected by the ban of the iPhones in China’s government agencies.

“Coupled with China’s persistent push for de-dollarisation within its global south allies, gold is likely to see a certain degree of demand over the medium-term to hedge the risk of a decline in US dollar demand as well as speculation,” he told StarBiz.

Gold’s low correlation to other asset classes means it provides a safe haven during times of uncertainty as witnessed in the early part of this year amid the banking crises in the United States and Europe when the commodity posted returns of 11.3% in the ringgit terms.

He said any fall in demand for gold from a weaker Chinese economy would be balanced out by purchases from other central banks such as India.

According to SPI Asset Management managing director Stephen Innes, gold is inversely correlated with US interest rates as it is a non-interest bearing asset.

“Typically higher real rates negatively impact gold prices. However, gold is currently holding up well despite higher real yields as bullion investors expect the Fed to cut rates in the first quarter of next year and for the US dollar to weaken,” he said.

Gold would likely trend between US$1,850 and US$2,050 at least till next year. Spot gold closed at US$1,919 a troy ounce last Friday after having tested US$2,000 in early August.

Wong said spot gold price would recover to the US$2,000 to US$2,030 levels provided the Fed gives a clear stance that the 5.5% to 5.75% on the federal funds rate will be likely the terminal rate for the current interest rate hiking cycle.

The US$1,900 price level is holding strong due partly to gold’s role as an inflation hedge following the significant increase in oil prices since the beginning of the year.

August, however, saw money in gold fall with significant outflows in the State Street’s Gold Trust ETF (exchange-traded fund).

The US$54bil fund saw US$1.6bil in outflow which robo adviser, StashAway Malaysia, said was due to weakening inflation trend and significantly less risk now in the financial markets compared with the first quarter when Swiss investment bank Credit Suisse and smaller US banks failed.

Wong Wai Ken, country manager of StashAway Malaysia was bullish on the metal.

“We expect US dollar weakness and improving investment demand via ETFs due to increased safe haven buying.

“In addition,we continue to see strong demand from central banks, especially in Asia, which is providing a positive sentiment among gold investors,” he said.

Innes said gold had been experiencing a “September effect” especially in the past decade. Notably, September tends to be a challenging month for gold, which has consistently lost ground against the US dollar in nine out of the last 10 years.

The trend extended to gold’s performance against the euro, with declines recorded in the past 10 years.

The pattern is likely influenced partly by the seasonal increase in real interest rates observed in September, with nine of the last 10 years showing such an uptick in US real rates.

Tradeview Capital chief investment officer Nixon Wong said the price softness could be temporary and gold price may remain elevated in 2023, given the higher expectations for a Fed pivot.

“With the expectation of an interest rate cut that would imply a weaker greenback, precious metals are generally used as a hedging tool.

“This is based on the fact that gold is priced in US dollars and as the value of the dollar strengthens, it takes fewer dollars to buy the same amount of gold,” he explained.

Conversely, as the value of the US dollar weakens, it takes more of the currency to buy the same amount of gold, causing the price of gold to rise.

Central banks are still diversifying the greenback for gold as recession concerns remained with the Fed anticipated to only cut rates in 2024 and lead gold to test the US$2,500 levels.

“Although many analysts promote a soft landing, the path to a soft landing is very narrow if you objectively look back at the market. The Fed needs to be extremely precise with policy timing to hit the soft landing target.

“Given the higher for longer and the lag effects of monetary policy, failing a favourable oil supply shock (more oil coming into markets) this year, I think there is a good chance of a recession in mid to late 2024,” he said.

He noted that retail demand, which is a huge element of physical demand, is weak in Asia due to currency weakness which makes gold very expensive on a cross-currency basis

Asked if now is the right time to accumulate gold, Innes stated there would not be a “perfect time”.

“Historically, when gold prices have dropped by 10% or 20%, the periods are perceived as favourable opportunities to buy,” he added.

Given the strong correlation between gold and the US dollar, as well as the weaker ringgit to US dollar pair, Malaysians might have concerns about potential drawbacks when purchasing gold.

Innes said its generally preferable to buy gold when the ringgit is strong.

“Given the ringgit is arguably undervalued, buying gold at current level could be risky business if the currency rallies,” he said.

According to Wong, gold could see fresh demand from investors seeking demand hedges if elevated inflation continues longer than expected and is fuelled by higher energy prices.

Most investors in the past decade have not experienced such a significant high level of inflation due to globalisation that supports deflationary forces coupled with relatively low levels of allocation to gold within the commodities asset class.

“Therefore, if persistent inflation conditions start to get sticky in 2024 or worse morphing into a stagflation environment, that may lead to a demand shock gravitating towards gold given such low levels of allocation in global investors’ portfolios,” he said.