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Gold surges to highest this year as turmoil skewers rate outlook

Tuesday, January 26, 2016 - 16:33
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Gold's stellar start to the year simply won't last as the US jacks up interest rates, according to Richard Jerram, chief economist at Bank of Singapore Ltd.

[SINGAPORE] Gold surged to the highest level in more than two months as demand for haven assets strengthened due to a global retreat in stocks and a renewed slump in oil, with investors scaling back bets about the pace and timing of US interest rate increases.

Bullion for immediate delivery gained as much as 0.9 per cent to US$1,117.80 an ounce, the highest intraday price since Nov 4, and was at US$1,116.27 at 4:08 pm in Singapore, according to Bloomberg generic pricing. The metal is up 5.2 per cent this year with the MSCI Asia Pacific Index is down 11 percent. The index fell Tuesday, snapping two days of gains, as stocks in China slid.

Gold has reestablished its credentials in the opening month of 2016 as the commodity that can outperform when aversion to risk increases. Investors have been turning to safer assets amid tumbling stocks, weaker oil prices and concern that China's currency may extend declines. The turmoil in financial markets has prompted investors to reduce bets that US interest rates will increase in March, adding to bullion's allure.

"There's risk in the equity markets, so that's why we have seen this increase in safe-haven demand," said Helen Lau, an analyst at Argonaut Securities (Asia) Ltd. "The US may withhold raising interest rates, so that's also warming up the sentiment toward gold. The funds are flowing into ETFs, so this will drive up the investment demand."

The odds of a rise in US borrowing costs in March have been cut to 25 per cent from 51 per cent at the start of the year, and the chance of a raise in June is now 43 per cent from 75 per cent, according to bets tracked by Bloomberg. Federal Reserve policy makers gather Jan 26 to 27 and analysts see no chanceof an increase at their first meeting of the year.

"Increasing rates is out of the question now, but the statements subsequent to that - what's the kind of tone and how hawkish they're going to sound, or how dovish they're going to sound - that will add more impetus to the current rally," Gnanasekar Thiagarajan, director of Mumbai-based Commtrendz Risk Management Services Ltd, said by phone.

Gold may head toward US$1,200 if it crosses strong technical resistance of US$1,140.45, said Gnanasekar. Bullion may rally to US$1,400 an ounce in the next few years, George Gero, the vice president of global futures at RBC Capital Markets, told Bloomberg in an interview. Prices haven't traded at that level since September 2013.

Holdings in exchange-traded funds backed by gold rose 0.5 metric tons to 1,503.5 tons as of Monday, data compiled by Bloomberg show. The assets climbed for a sixth day and are 2.9 per cent higher since the end of 2015.

Spot silver and platinum rose 1 per cent, while platinum gained 0.4 per cent.

BLOOMBERG