Even as gold continues to trade below $1,300, the “fundamental case for holding” the yellow metal remains intact, said Dutch bank ING, listing three main drivers that will provide support to prices.
“We look to physical demand, geopolitics, and inflation to provide support,” ING commodities strategist Oliver Nugent said in a note published on Friday.
Gold prices closed the week below $1,300 an ounce for the first time this year, after posting the largest weekly decline since December 2017. The biggest drop was on Tuesday when the precious metal plunged more than 2%.
As Asian markets opened on Monday, spot gold on Kitco.com was trading at $1,290, down 0.12% on the day, while June Comex gold futures were last at $1,290.10, down 0.09% on the day.
ING said it doesn’t expect to see gold prices fall much further, but does project for the next couple of months to be dull before any significant rebound is seen.
“Things shouldn’t get much worse, but it will take time before we see improvement,” Nugent said. “We expect longer-term holders/consumers to build a floor for the yellow metal even if it remains shunned by active money managers hunting for more attractive near-term returns.”
One of the signs that gold will hold its ground is ETF holdings, which increased to the highest level since 2013 and are showing little sign of liquidation after a drop in prices, Nugent added.
Another key aspect is ING’s forecast that the U.S. dollar is likely to reverse its rally later in the year, pressured down by uncertainties in the U.S.
“We look to the flattening yield curve and burgeoning twin trade deficits against the looming catalyst of mid-year elections or nearer term trade spats that could highlight the US policy/political uncertainties and spell a reversal for the greenback,” Nugent said. “As the dollar eases, it will be game back on for our bullish gold view, given our expectations for inflation to pick up substantially this year.”
Physical gold demand will also play a key role in boosting gold prices, according to ING.
“We are under no illusion that rates and currencies direct gold above everything else, but the impact of a tightening physical market will play an increasing role to cushion these lows,” noted Nugent.
Lackluster physical demand in the first quarter of the year was likely a temporary letdown, the strategist pointed out.
“The World Gold Council estimated a 7% YoY decline for Q1 demand which was a decade low and led very much by the 12% collapse in India. However, as the WGC point out, Q1 Indian demand was temporarily hit by the fewer auspicious days in the quarter (days deemed lucky for weddings). There were only seven such auspicious days in Q1 compared to 33 for the rest of the year.”
On top of that, there are some geopolitical issues that could come back and add support to gold prices, including North Korea negotiations and the EU-US trade standoff, Nugent added.
Source: Kitco News