Daily Management Review

Here is Why There Can be a Rebound in Gold Prices


01/26/2017




Here is Why There Can be a Rebound in Gold Prices
Ever since the rally in global stocks and dollar following Donald Trump's victory in the U.S. elections, gold prices have been under pressure. And reflected in the recovery of gold prices is the scaling back of optimism that emerged shortly after the U.S. elections, says a report from UBS.
 
"We think this is warranted and see room for gold to extend upwards as markets digest uncertainty around U.S. fiscal policy. But gold has also recovered considerably and market uncertainty at this point could encourage investors to lock in whatever profits they can for now, especially as seasonal gold demand fades," UBS said in a note.
The report further stated that demand for gold will see a decline with the Lunar New Year holidays starting in China on Friday and markets remaining closed next week. Ahead of the Chinese festival, there has been a dip in the prices of gold. The precious metal is down more than 6 percent since the U.S. elections even though it is trading nearly 8 percent higher over a 12-month period.
 
"We think gold's performance, as the typical Q1 seasonal demand fades, should provide a good gauge of investor sentiment towards gold at this point."
 
Buoyed by a weaker dollar and uncertainty surrounding President Trump's policies, gold prices hit two-month highs earlier this week. But with over 5 percent of gains so far in 2017, from a short-term perspective gold has already recovered considerably, UBS said in its research note. However gold prices could be pushed higher still due to growing weakness in the U.S. dollar. It might be recalled that the greenback tumbled to a six week low last week after President Trump's shocking comments that the dollar is too strong.
 
However, with big political events such as the U.K.'s decision to leave the European Union and U.S. elections, gold too has seen highs and lows in 2016  in a manner similar to currencies. Therefore the asset class continues to remain under pressure even though many analysts have said gold can reach $1,300 per ounce this year.
 
Meanwhile, the increasing political pressure and uncertainties of economic policies is also expected to result in the rise in prices of other commodities as well. This view was expressed by senior strategist multi-asset at NN Investment Partners, Koen Straetmans.
 
Political uncertainty would disrupt supplies and therefore raise prices even though it would weaken economic growth and demand for commodities, explained Straetmans.
 
"Increased geopolitical risk or an increase in protectionism could just as easily lead to commodity supply disruption, sending prices higher in the near term despite negatively impacting commodity demand, too."
 
Trump's fiscal push on infrastructure will be great for commodities, a number of analysts have said.
 
"Over longer periods, correlation between broad commodity prices and policy uncertainty is low to slightly negative. Exceptions include precious metals with a more pronounced positive correlation, and a strong negative correlation with the energy segment," Straetmans said
 
(Source:www.cnbc.com)






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