Gold’s poised to rally if it breaks through long-standing resistance levels as the Federal Reserve’s U-turn on monetary policy will weaken the dollar, according to Incrementum AG. Prices may climb to $1,450 to $1,500 an ounce by the year-end, said Ronald-Peter Stoeferle, managing partner at the Liechtenstein-based investment and asset-management company. One of the drivers will be demand from pension funds, high-net worth individuals and wealth managers, who are now on the sidelines, but will enter once the $1,360 to $1380 level is scaled, he said. Gold advanced last quarter after Fed policy makers unexpectedly signalled they’d hold their benchmark rates steady in 2019 because of troubling signs from the economy. Yields on 10-year Treasuries sank to a 15-month low last week amid speculation growth is faltering enough to trigger a rate cut this year. In addition as US public debt piles up, there’s a passionate debate about the merits of Modern Monetary Theory, or MMT – a school of thought that supports bigger deficits and is relaxed about central banks financing them.
“The Fed has backed down and reversed policy as we might already be in a pre-recession or perhaps even in a recession in the US,” Stoeferle said an in interview. In most economies, “data is coming in weaker and weaker, so central banks will step in to fight this global economic cooling,” he said.Spot gold traded at about $1,291 on Monday. The metal’s risen about 10% since closing at a 19-month low in August, with the bulk of the rise in the final quarter of last year. It hasn’t traded at $1,500 since 2013. As global growth slows, central banks will need to act with greater vigour, according to Stoeferle. “Due to decreasing marginal utility, they will have to act very aggressively with further rounds of QE, lowering rates, GDP targeting and even MMT,” he said. “This environment will be the perfect storm for gold.”
Stagflation Risk Stoeferle said his fund uses its own inflation indicator, which is currently showing increasing momentum. He said he isn’t ruling out a stagflationary trend – widely seen as characterised by little-to-slow growth and rising inflation – which would be a “great environment” for gold. Bullion has also had support in the past two quarters from central bank purchases and inflows into exchange-traded funds. Goldman Sachs Group Inc, which targets $1,450 in 12 months, said it expected both of those supportive trends to continue, with bullion poised for “a gradual grind higher.” While the outlook seems positive, there are still concerns. To break higher now the Fed’s hiking cycle has ended, bulls will need to overcome a “stack of strong resistances,” according to United Overseas Bank Ltd, which nevertheless targets $1,400 by December. Bullion also faces headwinds as the US economy is relatively healthy and global growth is expected to recover, said Luc Luyet, a currencies strategist at Pictet Wealth Management. “We are in a renaissance for gold,” Stoeferle said. “As sentiment towards gold and silver is still very negative, I see a skewed risk-reward ratio.”
Sources and photo-credits: Gulf Times, Bloomberg