December 15, 2015 6:00 pm JST
Commodities eye

Fed rate hike expected to bury gold deeper after brief rally

MICHAEL SAINSBURY, Asia Regional Correspondent

SHANGHAI -- Experts are predicting that gold prices will see a brief rally at the turn of the year, followed by more gloom for the metal, if the U.S. Federal Reserve lifts interest rates for the first time in nine years on Dec. 16.

     But speakers at the 10th Annual China Gold Conference in Shanghai last week were divided over whether the precious metal has found its bottom, with some suggesting it could start posting a more sustained price rise.

     Gold has been tarnished by the global meltdown in commodities markets that has seen prices in energy, metals, minerals and foodstuffs fall dramatically over the past 18 months. This has been caused partly by the slowdown in China's building and infrastructure boom just as fresh supplies of commodities came into production.

     The precious metal found a high of $1,896 per ounce back in September 2011, according to the group of banks known as the London Gold Market Fixing, which sets prices twice a day. By Dec. 11, however, gold closed at $1,072, having undergone a steady fall, hitting a six-year low of $1,050 on Dec. 3.

     In recent months the slide has been exacerbated by Fed Chair Janet Yellen's predictions that the central bank that controls the supply of the world's reserve currency, the U.S. dollar, would finally lift the greenback's interest rate from 0%. As interest rates rise, investors favor income-bearing investments over static, nonyielding commodities such as gold, silver and other precious metals traditionally used as safe-houses to store value in times of political and economic uncertainty.

     Better-than-expected employment figures in the U.S. on Dec. 4 appear to have convinced the market that Yellen will finally make her move on Dec. 16.

This is a test    

Jeffrey Christian, managing director of New York-based precious metals consultancy CPM Group, echoed the general view of the conference that gold has been marked down by markets too much on the expectation of a rate rise. "Changes in gold prices and changes in U.S. interest rates have tended to move in correlation," he added, referring to the fact that the Fed rate hike is, at least for now, expected to only test markets by raising rates at the bare minimum level.

     He added that the picture was muddied somewhat by the likelihood that the gold price will be bolstered by a traditional annual rally from mid-December over the New Year.

     Bart Malek, an analyst at TD Securities, told conference attendees on Dec. 9 that since the global financial crisis brought the world's economy to the brink of the abyss in 2008, gold has generally traded in correlation with the U.S. dollar, rather than based on its more historical relationship to supply and demand fundamentals.

     But a return to normalizing interest rates should see that shift back, Malek said. If that is the case, excess supply concerns as "new production commissioned during the commodities boom in 2010 and 2011 keep coming online will keep downward pressure on the price for the next 18-24 months," he added.

     While Malek believes that gold has further to fall, and with analysts at Goldman Sachs and Morgan Stanley predicting that the gold price will fall below $1,000 per ounce, others see it staying around its current range of $1,060-$1,080 per ounce.

     Still others, such as Adrian Day of Annapolis-based Adrian Day Asset Management, are more optimistic. "We think the Fed will be reluctant to raise rates much more in a U.S. election year," he said, adding that this would provide support for the gold price. So much will now depend on whether the Fed's expected move will be a one-off rise, or will signal the beginning of a tightening cycle of additional rate hikes during 2016 that would further underpin the strength of the dollar and bonds, and weaken the relative attractiveness of bullion.

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