ICBC: Gold Market Due For A Correction
(Kitco News)- Whilethere is still long-term bullish potential, the market is at risk for apullback as prices have run too far, too fast, according to the world’s largestbank.
Tuesday,in a note to clients, Marcus Garvey, senior manager at ?ICBC Standard Bank,said that he is particularly concerned with gold as the market is now moving intandem with interest rates. Historically, rising interest rates are negativefor gold as it raises the yellow metal’s opportunity costs.
Goldprices continued to hold near a four-month high as the U.S. 10-year yield pushedto 2.635%, its highest level since mid-2014. February gold futures last tradedat $1,339.40 an ounce, up 0.56% on the day.
“Itshould be noted that gold has diverged from its multi-year correlation with U.S.real rates and even if one believes that we are entering a new market paradigm,as global QE begins to be wound down, the risk of a correction is plain to see,”Garvey said.
One ofthe reasons gold has been able to buck the trend of higher yields is because ofa weaker U.S. dollar. The U.S. Dollar Index fell to fresh three-year lowsTuesday. Garvey said that the greenback continues to look weak as the bondmarket shows a flat yield curve, with the spread between 10-year and 2-yearbond notes at 58 basis points.
However,Garvey added that a lot of that was already priced into the gold market.
“Wheninvestors are already expressing that position in interest rate, currency andprecious metals markets, it looks like a crowded trade,” he said. “That doesnot mean the argument is wrong or that markets cannot go further but, onbalance, the risk of a correction leads us to urge caution at this time.”
Ultimately,Garvey said that in the near-term, speculative interest in the precious metalhas probably risen as high as it can go.
“Onecannot escape the fact that investor positioning is now extremely long, makinga series of multi-year highs,” he said. “...[I]n the short-term it opens up themarket up to the risk of a correction.”
Despitethe risk of a near-term correction, Garvey said that he remains optimistic onthe gold market for 2018 as the bank expects low inflation pressures to keepthe Federal Reserve from aggressively raising interest rates.
“U.S.inflation will continue to undershoot the Fed’s forecasts and that thevulnerability of U.S. consumers to higher real rates will give the Fed pause inits pace of rate normalization. The market’s gradual re-pricing of this shouldallow gold prices to trend incrementally higher,” he said in his outlookforecast last month.
ICBC, the largest bank in the world by totalassets and the most valuable bank in the world by market capitalization,expects gold prices to average the year around $1,312 an ounce.
By Neils ChristensenFor Kitco News
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