July 4, 2017 – Gold prices are looking susceptible to further falls as central banks have signalled that the era of easy money may be coming to an end.
Recent comments from leading central bankers could set the stage for a potential removal of measures seen as a safety net for financial markets.
Central banks introduced quantitative easing and cut interest rates to historically low levels to tackle the global financial crisis which erupted around 2008/9.
Last week, bond yields surged after some leading central banks signalled that the current period of ultra-low monetary policy may be winding up.
The prospect of potentially higher yields turned investors off non-interest-bearing bullion, which touched a seven-week low of USD$1,218.50 per ounce on July 3, while share markets fared much better.
A softer trend in gold prices will be welcomed by jewellers and manufacturers looking to re-stock the precious metal.
“Gold currently looks vulnerable,” UBS Group AG analyst Joni Teves said in a note.
“Higher yields and market participants digesting a hawkish shift in tone among key central banks of late, while equities stay resilient around all-time highs,” are bearish for bullion.
The hawkish tone contributed to a fall in gold prices of more than 2 percent in June, stalling a rally of nearly 8 percent in the first half of 2017.
The U.S. Federal Reserve (Fed) has already begun a series of interest rate hikes, with many analysts expecting a further tightening of monetary policy this year.
Goldman Sachs said in a note in late June that it expected the current phase of rising rates in the United States, the world’s largest economy, to weigh on bullion prices.
“We have a balanced gold outlook with our 6/12 month forecasts at USD$1,250 per ounce,” it said.
“We expect higher U.S. real rates and Fed balance sheet reduction to put downward pressure on gold,” it added.
However, Goldman Sachs said gold prices were likely to be supported by a soft dollar, subdued global growth and expectations for a rising appetite for precious metals from emerging markets.
SocGen, in a recent presentation, also struck a bearish note on bullion.
“Fed tightening (of monetary policy) this year and in 2018 – whether in the form of higher interest rates or balance sheet deleveraging – will inevitably dent investors’ appetite,” it said.
A key question will be the pace of future interest rate hikes by the Fed.
If inflation in the United States remains benign, momentum for further rate rises may slow down.
If the U.S. economy generates more jobs than expected, the pressure for further rate rises will build, potentially dragging on gold.
The main underpinning factors for gold are likely to be the outlook for a weak dollar, which makes bullion less expensive in terms of other currencies, and the world’s volatile and uncertain geopolitics.
Risks of heightened tensions between the United States and North Korea, and worries over conflicts in the Middle East, can boost gold’s appeal as a safe-haven investment.