Gold at ‘Rich Level’ to Struggle as Fed May Hike Three Times

Lower for Longer: Navigating the U.S. Trading Environment
  • Luyet says three U.S. rate rises are likely by the end of 2017
  • ‘The U.S. economy will remain relatively robust,’ says Luyet

Gold may have met its match after a stellar start to the year as a probable trio of rate hikes from the Federal Reserve through to the end of 2017 means there’s little room for it to rally further from near a two-year high, according to Pictet Wealth Management.

With the dollar in a long-term uptrend, bullion isn’t likely to break the $1,430 an ounce level, and may stabilize around $1,250 to $1,300, said Luc Luyet, a currencies strategist at the wealth-management arm of the Pictet Group, which managed 401 billion euros ($447 billion) as of Dec. 31. While the U.S. presidential election in November may provide some catalysts for gains, they’ll be temporary, Geneva-based Luyet said in an interview.

“It’s already a rich level for gold,” said Luyet, 42, who joined Pictet in 2015, and has four years’ experience covering currencies and precious metals. “The U.S. economy will remain relatively robust, we could expect 2 percent growth in 2017, so therefore we expect the Fed to continue with the tightening cycle.” 

Bullion has rallied 27 percent this year, aided by the low interest-rate environment in the U.S., negative rates in Japan and parts of Europe, and demand for havens caused by the U.K.’s Brexit vote. Luyet’s outlook reflects concern there may be not much more room for gains, with Michael McCarthy, Sydney-based chief market strategist at CMC Markets, saying this week prices may drop as European concerns fade and the U.S. shows signs of strength.

Raise Rates

“We still expect that the data will improve in the third quarter and should allow the Fed to raise rates in December,” said Luyet, who has a neutral call on gold. “This will support real rates, and therefore should negatively impact gold.”

Spot gold traded near $1,345 an ounce in London after posting back-to-back quarterly gains in the first half and following that with a 2.2 percent climb last month. It’s eased from a July peak of $1,375.34, which was the highest since March 2014 after better-than-expected U.S. jobs data.

Odds of the Fed tightening in December are 45 percent, up from only 12 percent at the start of July, Fed funds futures data show. The payrolls figures on Aug. 5 prompted Allianz SE’s Mohamed El-Erian to say bond traders were underestimating the likelihood that the Fed could tighten as early as next month, and Goldman Sachs Group Inc. says it now sees a 75 percent chance of a hike by the year-end.

Gold still has its backers. Singapore-based DBS Group Holdings Ltd. said last month that bullion is in a major bull market and may surge to more than $1,500 as low rates buoy demand and the U.S. presidential election looms. Investors have also been pouring funds into gold-backed exchange-traded products, lifting assets to the highest since 2013.

“There’s already a lot of people that are very bullish on gold,” said Luyet, noting that wagers tracked by the Commodity Futures Trading Commission still show substantial bets on further gains. “Going forward, the U.S. economy is still robust, and the Fed is hiking rates. I don’t think that will really provide a supporting environment for gold.”

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