Gold Outlook Pits DBS's Overweight Call Against Goldman's Bears

Goldman's Gold Call: Time to Sell the Fear Barometer?
  • Financial market volatility may continue, DBS's Jaradi says
  • Bullion remains top commodity performer in 2016 after rally

Gold is set to benefit from sinking expectations for higher U.S. interest rates and the potential for further market turmoil, according to DBS Group Holdings Ltd., the Singapore-based bank that turned overweight on bullion last year before the metal surged.

“Volatility in financial markets due to the Chinese/global slowdown and low oil prices and doubts regarding the effectiveness of monetary easing could continue,” Manish Jaradi, senior investment strategist at DBS’s Chief Investment Office, said in an e-mail. “This could keep risk appetite in check and U.S. dollar rates low, supporting gold.”

Bullion rallied to the highest level in a year last week as traders cut bets on tighter U.S. monetary policy and negative rates spread in Europe and Japan, boosting the metal’s allure. The advance was buttressed by volatility in financial markets, sinking oil prices and concern that the global economy may be faltering. DBS’s positive stance contrasts with the outlook from Goldman Sachs Group Inc., which this week reiterated its forecast that gold will tumble, saying this year’s fear-driven rally wasn’t justified.

“The sharp scale back in U.S. Fed rate hike expectations and negative rates elsewhere suggests a ‘low for longer’ theme is back in focus,” Jaradi wrote. “With inflation expectations stable in the U.S., declining real yields could aid gold. Having said that, gold looks overbought in the near term.”

Top Performer

Gold for immediate delivery traded at $1,204.90 an ounce at 4:55 p.m. in Singapore, 14 percent higher this year to beat all other raw materials in the Bloomberg Commodity Index, according to Bloomberg generic pricing. Last week, the price gained to $1,263.48, the highest since February 2015.

While Jaradi said bullion may be overbought in the near term, the bank is maintaining its overweight call on a three-month and 12-month tactical-asset allocation basis. The bank turned overweight on gold last August, and then placed a short-term tactical bullish call on the metal in early February.

Investors have poured funds into bullion-backed exchange-traded products this year as prices climbed. The assets have surged by 142.5 metric tons so far in 2016, eclipsing the drop of 138.4 tons in all of last year, according to data compiled by Bloomberg.

Goldman’s View

Goldman Sachs analysts including Jeffrey Currie and Max Layton have recommended that investors short gold, setting out their bearish case in notes on Feb. 15 and Feb. 8. The price will probably retreat to $1,100 an ounce in three months and $1,000 an ounce in 12 months, according to Goldman, which said it was time to “sell the fear barometer.”

In December, the Federal Reserve raised borrowing costs for the first time in almost a decade and initially signaled four hikes this year. Chair Janet Yellen has since hinted that the central bank may delay plans for tighter policy to assess how the economy reacts to current headwinds. Pricing on federal funds futures indicates investors see just 34 percent odds of a hike by December.

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