Gold Seen Rebounding Next Year Amid Low Real Interest Rates

We’ve not seen the last of the rally in gold, according to Toronto-Dominion Bank.

Prices are likely to go as high as $1,350 an ounce sometime next year, after dipping below $1,200 as the Federal Reserve raises interest rates, likely in December, according to Bart Melek, the bank’s head of commodity research. Futures traded at $1,254 on the Comex in New York on Monday.

Higher borrowing costs should initially lead to a stronger dollar, curbing demand for gold, he said in an interview in Singapore before the London Bullion Market Association and London Platinum & Palladium Market annual conference. Demand will be reignited as real interest rates, or yields minus inflation, remain low, keeping gold competitive with other assets, he said, with the highs earlier this year being tested by the end of 2017.

Speakers were positive on the outlook. Bullion will benefit as the market realizes traditional methods aren’t working when it comes to monetary policy, said Terence Kooyker, portfolio manager at Blenheim Capital Management LLC. Investors should increase the share of gold in portfolios, said Ray Eyles from Millennium Capital Management, while the metal even at zero interest is a high-yielding asset in the current environment, said Eric Robertsen, head of global macro strategy and forex research at Standard Chartered Bank.

Assets Expand

Gold rallied 25 percent in the first half, helped by the Fed’s inaction in raising borrowing costs and uncertainty after the U.K vote to leave the European Union. While prices have dipped, investor demand remains resilient. Holdings in gold-backed exchange traded funds were 2,051 metric tons by Oct. 14, the highest level since June 2013, according to data compiled by Bloomberg.

Investors see a roughly two-thirds probability of a quarter percentage point rate hike at the policy-setting Federal Open Market Committee’s meeting in December, and a less than 20 percent chance of a move at next month’s gathering, held the week before the U.S. presidential election on Nov. 8.

Gold could dip below $1,200 if the Fed hikes in December and physical demand during the festive period in India is weaker than expected, before recovering to between $1,200 and $1,350 in 2017, according to Shekhar Bhandari, head of global transaction services and precious metals at Kotak Mahindra Bank Ltd. The lender expects one rate increase at the end of 2016 and a further two next year, Bhandari said in an interview on Oct. 13.

“I think the gold market may surprise us again,” said Brad Yates, trading head for Dallas-based refiner Elemetal LLC. “Over the long term, people have realized the benefit of portfolio diversification.”