Weaker U.S. Dollar Trend Won't Last - Capital Economics
(Kitco News)- The gold market can attribute about half of its gainsfrom a weaker U.S. dollar, a trend that might be unsustainable through 2018according to one British research firm.
In a report, Wednesday, Simona Gambarini, commoditieseconomist at Capital Economics said that the recent gains in gold could bereversed as the U.S. dollar finds new momentum from rising interest rates.
April gold futures last traded at $1.346.20 an ounce, up0.46% on the day; while prices are off their recent 1.5-year highs, the yellowmetal is up 3% since the start of the year and up almost 9% since the Decemberlows. Despite the strong start to the year, Gambarini said that her firm ismaintaining its price target for gold to fall to $1,200 an ounce by the end ofthe year.
“We think that the dollar will appreciate slightly thisyear, which should put some downward pressure on gold prices,” she said.
Currently, the U.S. Dollar Index continues to trade neara three-year low at 88.89 points.
Capital Economics is bullish on the U.S. dollar asinterest rates are expected to rise. The firm sees the potential for theFederal Reserve to raise interest rates four times in 2018. Markets are pricingin a 60% chance of only two rate hikes.
Gambarini’s comments come as the Federal Reserve preparesto release its first monetary policy decision of the year. However, markets arenot expecting any significant policy announcement as the central bank will onlyissue a statement, which will be Fed Chair Janet Yellen’s last.
Markets expect that March meeting will likely see thefirst rate hike of the year as Jerome Powell takes the helm.
Looking at interest rates, Gambarini said that, gold hasbeen able to rally against higher bond yields because of rising inflationexpectations.
“But even based on US 10- year TreasuryInflation-Protected Securities (TIPS) yields, the price of gold appearsovervalued.,” she said.
Capital Economics expects that four interest rates hikeswill keep inflation pressures in check, which would eventually cause a rise inreal bond yields, raising gold’s opportunity costs.
By Neils ChristensenFor Kitco News
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