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Gold loses safe-haven shine as greenback, interest rates rise

Dollar boosted by strong job gains, higher household spending and business investment, as well as dovish central bank rhetoric out of EU and Japan

Pundits expect gold prices to remain depressed as the greenback remains supported by speculation over further Fed rate hikes this year, along with US-China trade tensions.


GOLD's allure as a safe haven has dulled with the precious metal being outshone by the US dollar. Prices slipped to the lowest level since 2016, upending expectations that investors would flock to the asset class during troubled times of geopolitical and escalating global trade war risks.

Much of the slump in gold prices - spot gold prices have lost nearly 4.6 per cent this year - unfolded on the back of a US dollar rally amid rising interest rates that has made higher-yielding assets such as the greenback, also a safe haven asset, preferred.

"US interest rates have risen steadily since January and with a three-month Treasury bill yield at 1.92 per cent, that makes holding gold less attractive since the metal provides no fixed income return," said analyst Charles Spencer on SmartKarma in a note last week.

The yellow metal, deemed an effective inflation hedge, may also be less useful now with inflation remaining muted despite higher oil prices and weaker emerging market currencies.

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Prices of zero-yielding gold dived to a fresh 2018 low on Tuesday; it stood at US$1,243.16/oz at around 3.20 pm in Singapore versus its above-US$1,300 handle early in the year.

Sustained weakness under US$1,245 could result in a decline towards US$1,233, said FXTM analyst Lukman Otunuga, adding that gold remains extremely sensitive to the negative correlation against the dollar.

The dollar is being supported by rosy US-centric economic indicators chiefly strong job gains, lower unemployment levels, higher household spending and business fixed investment, while dovish central bank rhetoric out of Europe and Japan has lent the currency further strength, said OCBC economist Barnabas Gan in a report on the second half outlook for commodities.

No surprises then that money managers have cut their speculative holdings in gold options and futures and focused on the stronger dollar since mid-April. According to Mr Gan, net-long positions in gold over a four-week moving average have fallen to their lowest since July 2017 - when signs of global economic fundamentals were robust.

Pundits expect gold prices to remain depressed as the greenback remains "heavily supported" by speculation over the Federal Reserve hiking rates two more times this year although Mr Gan does not rule out a gold boost in the fourth quarter amid some unwinding of US dollar strength.

For now though, demand for the dollar is further fuelled by the threat of a US-China trade spat, which would hurt global economic growth if it morphs into a full-blown trade war. More analysts now seem inclined to consider such a risk in their projections.

For the first time in two years, Schroders has cut its global growth forecast for 2018 and 2019, citing rising oil prices and the uncertainty over trade relations that could drag business decisions to hire and invest, particularly for exporters.

DBS Group chief economist Taimur Baig remarked that while a full-blown trade war - this risk is not limited to US and China but also US' other trading allies Canada, Mexico and the European Union - may still be unlikely and global growth indicators are still strong, the "first signs of real damage" are emerging with announcements of postponed or redirected investments.

US Fed chair Jerome Powell recently remarked that for the first time in this cycle, business owners mentioned their decisions to postpone investments as well as hiring. In the US, confidence of homebuilders fell in June amid concerns over rising Canadian timber prices due to recently imposed import tariffs.

Jitters could rise in the lead up to the July 6 deadline for US tariffs on Chinese goods to kick in, which most expect to provoke a strong tit-for-tat reaction from Beijing.

Mr Taimur added: "...there should be no question that there is no positive to this saga; China's businesses and consumers will be hurt by higher tariffs and other trade barriers.

"For the rest of Asia, given the trade openness and exposure to the supply chain, there will no respite whatsoever for Malaysia, Singapore, South Korea, and Taiwan in this tail- risk scenario."

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