3 reasons the gold slump may be over
- Gold has fallen more than 5% from its April high.
- But Capital Economics says the rout is over.
After slumping over the past few months, some think gold prices may have hit a floor for this year.
Prices have fallen more than 5% since their April high and on Tuesday slipped below a key level $1,300 for the first time this year. Markets have been positioning for rising interest rates, which tend to move opposite of gold prices with regard to the opportunity cost of non-interest bearing assets.
But there are three reasons to think prices may not fall any further, according to Capital Economics analyst Simona Gambarini. Even following the recent dropoff, the firm is maintaining a price forecast of $1,300 per ounce for 2018.
1. Demand tends to be price-sensitive in emerging markets
Demand in India and China, two major gold consumers, has been relatively low this year. But as prices fall, specifically below the psychologically important level of $1,300 an ounce, demand could pick up since it tends to be elastic in emerging markets.
2. The dollar could fall versus the euro soon
The "trade-weighted" gold price, a measure of the value of gold based on major currency movements, suggests that dollar strength explains much of the recent weakness in gold prices.
And though the euro has fallen nearly 5% against the dollar over the past three months, Gambarini thinks that may have been due to "temporary" factors and that the two currencies may switch places soon.
"If we are right and those are reversed over the coming months, the dollar should also come off the boil, which could provide some support to the price of the yellow metal," Gambarini said.
3. Demand for inflation hedges should support prices
Both inflation and expectations for rising prices have been steadily rising this year — personal-consumption expenditures hit the Federal Reserve's target of 2% in March. And while the central bank is on track to raise rates two or three more times this year, inflation jitters could still drive investors to gold.
"This, in turn, could feed through into higher demand for inflation hedges, like gold," Gamborini said.
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