A weak dollar and worries over the U.S. economy are supporting gold so far in 2018, but prices of the yellow metal this year will be tied to shifting sentiment over the pace of U.S. interest rate rises.

The strength of gold prices has been inextricably linked to a prolonged weakness in the U.S. dollar in which bullion is priced.

A soft dollar makes gold cheaper in terms of other currencies, such as the pound.

The dollar has been depressed by concerns over prospects for a ballooning U.S. fiscal deficit after tax cuts by the Trump administration.

“It all comes down to interest rates,” Jeffrey Christian, Managing Partner of precious metals consultancy CPM Group, told BNN in a video broadcast this week.

“Investors around the world are looking at the U.S. government’s behaviour, including its fiscal policy, its tax cuts, its expenditure plans, and a quadrupling of the expected deficit,” he added.

“You have a reduced demand for Treasuries (bond yields), just as the U.S. government is quadrupling its debt. That’s got to be negative for the U.S. economy. All of that negativity about the U.S. economy has got to be good for gold.”

A key focus for the gold market will be sentiment over the pace of expected future interest rate rises in the world’s largest economy to contain inflationary pressures as the U.S. recovery gathers momentum.

If investors believe rises in U.S. rates will be quicker than previously thought, for example, they could switch out of non-interest-bearing bullion into alternative assets.

Bullion prices eased for the fifth consecutive session on February 22 as the dollar was underpinned by minutes of a U.S. Federal Reserve meeting that showed support for further interest rate increases.

Spot gold touched a more than one week low of $1,320.61 per ounce on February 22.

Christian said he expected gold prices to dip in the near term towards $1,280 an ounce and later recover to trade in the $1,350-1,400 range towards the end of 2018.

A further potential driver of gold prices this year can be any possible boost in geopolitical tensions – for example, if there were a flare-up in strains between the United States and North Korea — which could send gold prices higher.

Gold can be attractive to investors as a safe haven asset at times of heightened geopolitical tensions.

DOLLAR-POUND EXCHANGE RATE

The pound-dollar exchange rate will remain in focus for UK-based gold jewellers and manufacturers, with expectations of further rises in UK interest rates this year seen supporting the pound.

A stronger pound will make restocking dollar-based gold more affordable for UK jewellers and gold jewellery manufacturers.

The exchange rate of the pound against the dollar will continue to be tied to the progress, or any roadblocks, in ongoing Brexit talks between UK and EU negotiators.

Government ministers are due to give keynote Brexit speeches in the weeks ahead.

Sterling rose this month after figures showed UK inflation unexpectedly stayed near its six-year high in January, reinforcing sentiment that the Bank of England will raise interest rates again in May following the last hike in November.

Disclaimer: this column should not be seen as advice or a recommendation for investment. Any opinions expressed are those of the author.

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