April 26, 2018 – Gold is facing downward pressure from a resurgent dollar, but the dollar rally is likely to run out of steam setting the stage for a recovery in bullion prices later in 2018.
Gold traded at near five-week lows in late April, driven largely by a stronger dollar on the back of rising U.S. Treasury yields.
Bullion is priced in dollars, so big swings in the dollar exchange rate can have an impact on prices of the yellow metal.
Gold prices tend to be inversely related to the dollar. A costlier dollar tends to dampen demand for gold.
From the perspective of UK jewellers and jewellery manufacturers, the stronger dollar and weak pound mean acquiring gold is more expensive in sterling terms.
Uncertainty over whether the Bank of England will raise interest rates in May, has weighed on the pound lately. Sterling was at near five-week lows against the dollar in late April.
The odds of a UK rate rise have reduced since Bank of England Governor Mark Carney said UK economic data was “mixed” and that there were several other meetings of the committee that sets interest rates this year.
The surge of the dollar has been in part linked to expectations that the U.S. Federal Reserve (Fed) will raise rates again this year to control inflation as the world’s biggest economy continues its recovery.
A climate of rising U.S. interest rates tends to drag on the price of gold as bullion bears no interest, making alternative assets more attractive to investors.
Some analysts, such as Suzi Cooper of Standard Bank, feel that gold is likely to face downward pressure around the time the Fed meets in June before recovering in the second half of 2018.
“In the second half of the year we are expecting (gold) prices to test five-year highs averaging $1,374 (per ounce) in the fourth quarter,” Cooper said in an interview on CNBC in late April.
“Much of that momentum, we believe, will be driven by the dollar actually starting to weaken again.”
Gold traded up 0.1 percent at $1,323.60 per ounce on April 26.
Any future recovery in gold prices could be driven by its “safe-haven” appeal.
If tensions in the Korean pensinsula flare up again, or if the China-U.S. trade spat aggravates, or if the Russian response to the recent allied air strike in Syria intensifies, gold has the potential to rally again.
Investors see gold as a safe-haven at times of heightened geo-political tensions.
“The dollar recovery (in April) has probably been due to the apparent easing of trade war tensions, particularly with respect to Chine, and the Syrian missile adventure does not appear to have excited a seriously hostile response from Russia,” wrote Lawrie Williams, a gold market commentator for bullion dealer Sharps Pixley.
“Indeed it look like the U.S. may even be easing its Russian sanctions position a little, but any of these could flare up at any time – particularly given President Trump’s unpredictable propensity to tweet.”
“But even so, the dollar rally may not have much further to run and may well turn downwards again. How much and how far will likely set the pattern for the gold price.”
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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