TOKYO -- Gold prices appear ready for a rebound after floundering for some time as investors seek the safe-haven asset amid concerns over the global economy, with the negative impact of a U.S. interest rate hike mostly factored in already.
Gold traded at around $1,135 per troy ounce in off-hours trading in New York on Friday, climbing about $20 on buybacks by speculators after the Federal Reserve Board's decision Thursday to forgo a rate hike. Gold, which does not earn interest, loses attractiveness when interest rates rise.
In any event, a protracted downtrend is deemed unlikely. Even if the Fed lifts rates, "gold prices may dip temporarily but will likely turn up afterward," says Yuichi Ikemizu, manager of ICBC Standard Bank's Tokyo branch. Gold prices have already fallen almost $200 since the beginning of the year on speculation of a U.S. rate hike.
History shows that the gold market bottoms out about three months before the Fed increases interest rates. Gold prices spiked about 50% during the Fed's rate-raising cycle from 2004 to 2006. In July, gold sank below $1,100, the lowest in five years and five months, as concerns over the Greek debt crisis receded. The market has been solid since then, and Ikemizu argues that "a rate hike will no longer be an incentive that drives the market."
Speculators in China are stepping up buying of gold. Retail investors who suffered losses due to the stock market's wild run have started to invest in gold to diversify, says Roland Wang, managing director for China at the World Gold Council. Prices in the Shanghai market are about $5 higher than other markets around the world.
Gold inventory has decreased more than 60% over the past month at the Comex in New York, reaching the lowest based on available data since 2011. Investors who bought gold futures are choosing to receive physical delivery of the metal instead of cashing out. Investors in Shanghai also are getting their hands on gold bullion.
Another factor is that in the U.S., the Volcker Rule prohibiting high-risk proprietary trading by financial institutions has made it difficult for speculative money to enter the commodity futures market.
"The gold market is at a major turning point from a medium- to long-term perspective," says Itsuo Toshima, market analyst and former Japanese representative of the World Gold Council. "From now on, prices will be formed by supply and demand in the spot market."
Buying by the jewelry industry, which has a major impact on the spot market, still lacks momentum. However, on the supply side, gold production will peak out. Gold veins believed to be feasible for mining have pretty much already been developed, and there are few new mining projects on the table. This has many market players anticipating that gold prices will rise next year and afterward.