Gold to suffer on US uncertainty - Garth Theunissen - Sun, 08 Jul 2007
[miningmx.com] -- UNCERTAINTY surrounding the US economy and dollar volatility may impact negatively on the gold price, said Standard Bank senior commodities analyst, Dr Walter de Wet. “Due to the increased volatility in dollar movements and uncertainty on where the US economy is heading, investors are less eager to buy or sell gold every time the dollar moves,” said de Wet.
“This results in higher volatility in gold price movements, which coupled with higher US bond yields means investors are more likely to shift out of gold and into safer alternatives like US government debt.”
David Hall, global metals and mining analyst at Macquarie First South Securities in Johannesburg said rising US bond yields were a negative price driver for gold at present. “The rising global risk that we see reflected in [higher] US bond yields takes people out of gold as investors tend to prefer safer investments like US treasuries during times of economic uncertainty,” said Hall.
The yield on the benchmark 10-year US government note spiked to a five year high of 5.327% on June 13 and was trading at 5.14% at the time of writing from as low as 4.63% in May.
Since mid-March the dollar has also fluctuated erratically between $1.32 and $1.36 to the euro, and between $1.96 and $2.017 against the pound, largely on US economic uncertainty.
Although the general rule of thumb is that gold gains on dollar weakness, this has failed to materialize recently despite the dollar having flirted flirted with fresh historic lows against both the euro and the British pound.
On April 25, gold rallied to $691/oz as the dollar touched an historic low of $1.3651 against the euro and over $2 to the pound. At the time of writing the dollar was again trading at around $1.36 to the euro yet gold was trading over $44 lower than its April mark at just $646,95/oz.
That’s despite the fact that Hall has observed a 78% correlation between the gold price and the dollar/euro exchange rate since November 2005.
De Wet said this is all due to uncertainty surrounding the US economy and the Fed’s likely monetary policy response. “Because the Fed targets both growth and inflation, under current circumstances where uncertainty surrounds the direction of both these variables, their policy decisions become much less predictable and that introduces uncertainty into the market.”
“As soon as risk sentiment increases portfolio managers tend to become more conservative and prefer to shift funds into traditional safe havens such as fixed income products rather than relatively more volatile commodity stocks and funds,” he said.
Henk Viljoen, head of fixed interest investment at Stanlib Asset Management, agreed the mixed signals from the US had made it difficult to forecast where US interest rates were going. “Market expectations of US interest rate bias has moved from sideways-to-falling to sideways-to-rising and back to sideways in a matter of weeks,” Viljoen said.
However, the Fed hinted that for the moment a cut in rates was unlikely, as it was not convinced the battle against inflation had been won. This was despite the fact that US consumer inflation measured just 1.9% in the year ending May, the first time during Fed Chairman Ben Bernanke’s 16-month tenure that inflation fell within the so-called comfort zone of 1% to 2%.
Federal Reserve Bank of San Francisco President Janet Yellen also said keeping the Bank’s benchmark rate at 5.25% was the best way of avoiding an economic slowdown whilst at the same time keeping inflationary pressures at bay.
A survey of 81 economists by Bloomberg News showed that expectations are that the US Labor Department will announce that the US economy added 125,000 jobs in June 2007 compared to 157,000 a month before. Analysts say this is the surest sign that the US economy is not heading for a recession thus negating the need for the Fed to consider cutting rates.
That’s largely why the yield on the benchmark 10-year US treasury was trading back at 5.14% at the time of writing despite having fallen below 5% earlier this week.
But De Wet is adamant that this rise in yield is not good for gold.
“Although gold is distinguished from other commodities in that it acts as a quasi-currency that is often used as a hedge against inflation, when risk premiums start to rise gold will suffer due to it’s commodity status,” he said. “At the end of the day gold is still a commodity that is consumed in large quantities, which makes it more volatile than bonds. That’s why gold, and commodities in general, will always stand last in line when portfolio managers distribute their funds.”
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