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Gold, Trump and rates: bank that foresaw rally flags US$1,500

Monday, July 18, 2016 - 14:28
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Gold is in a major bull market and may surge to more than US$1,500 an ounce as low interest rates buoy demand and the US presidential election looms, according to DBS Group Holdings Ltd, which foresaw this year's rally and is now advising investors to buy any declines.

[SINGAPORE] Gold is in a major bull market and may surge to more than US$1,500 an ounce as low interest rates buoy demand and the US presidential election looms, according to DBS Group Holdings Ltd, which foresaw this year's rally and is now advising investors to buy any declines.

"Gold has seen four major bull markets since 1970: this is another one," Benjamin Wong, foreign exchange strategist at the Singapore-based bank's Chief Investment Office, said in an e- mail.

"The market has yet to deal with the political uncertainty going into the Nov 8 presidential election." Bullion rallied to the highest since March 2014 this month, topping US$1,375, as volatility in global equities, the spread of negative interest rates, and the turmoil surrounding Britain's vote to leave the EU fanned demand.

As the timeline draws closer for Americans to choose a new leader, the Federal Reserve may hold off from raising borrowing costs in September or November, potentially benefiting gold. Last week, Bank of America Merrill Lynch also listed the US vote among factors that may lift bullion to US$1,500 over 12 months.

"We remain bullish and gold carries an overweight rating," said Mr Wong, who also cited technical charts supporting the stance, including a so-called inverse head-and-shoulders pattern.

Last October, DBS flagged the potential for gold to gain this year, saying then the Fed would raise rates only gradually. It followed that in February with another positive outlook on bullion.

Bullion for immediate delivery, which traded at US$1,330.18 an ounce on Monday, was last above US$1,500 in April 2013, according to Bloomberg generic pricing. After dropping for three years, it's 25 per cent higher so far in 2016 as investors boosted holdings in exchange-traded funds.

In the US contest, presumptive Republican nominee Donald Trump will go up against Democrat Hillary Clinton. While polls show the former secretary of state holding a slim advantage over Mr Trump, both candidates are saddled with high unfavourability ratings. The Republican convention opens on Monday.

"The next few weeks, as the political debate heats up in the US, the support for gold is going to increase," Francisco Blanch, head of commodities research at Bank of America Merrill Lynch, said in an interview with Bloomberg Television Canada.

Long-term interest rates are pretty anchored, and will probably end up moving lower over time, he said.

While the US central bank raised borrowing costs in December for the first time in almost a decade, bullion advanced this year as investors scaled back bets on follow-through increases.

Investors see only an 8 per cent probability of a rise in July, while the odds of a move by December are at 44 per cent, according to pricing in federal funds futures contracts.

Any dips to US$1,296 to US$1,300 would be opportunities to accumulate, said Mr Wong. The next rebound may top resistance at about US$1,380 and move prices toward US$1,437 to US$1,455, he added.

"Longer term, if the full force of the inverse head-and-shoulders pattern is applied, there remains scope for US$1,525."

BLOOMBERG