Gold gets cheaper, Goldman recommends buying

10 Oct 2016

The Federal Reserve has spooked investors out of gold. Prices last week posted their biggest weekly slump in three years as hawkish comments from multiple Fed officials ignited concern that the central bank will soon raise U.S. interest rates. On Friday, Cleveland Fed President Loretta Mester said there was a “strong, compelling case” to increase borrowing costs even after the Labor Department published a weaker-than-expected U.S. payrolls report. That day, gold fell to the lowest since June. Fed Bank of Richmond President Jeffrey Lacker and Chicago Fed President Charles Evans also made comments last week that signaled higher rates are probably on the way. Adding to gold’s woes has been a strengthening dollar. The U.S. currency is trading near a two-month high against a basket of 10 counterparts, reducing demand for alternative assets. Futures traded on the Comex in New York retreated 5 percent last week to $1,251.90 an ounce on Friday. Gold surged 25 percent in the first half of the year amid a slowdown in global growth. Since the end of June, prices have dropped more than 4 percent as leaders in Europe and Japan took steps to shore up economies, while the U.S. expansion stayed strong. Investments in gold through exchange-traded funds also declined relative to the peak in August by 0.1% to 2,037.3 metric tons. Other precious metals have also retreated. Silver futures plunged 9.6 percent last week in New York, the most since 2013, and money managers reduced their wagers on a rally to the lowest since June. Investors are preparing for a new slump, reducing net-long positions in gold. Open interest in gold futures is slumping. Prices for silver, platinum and palladium have also declined, which is not surprising: higher rates reduce the appeal of precious metals as a store of value. A resilient U.S. job market and gains for the service economy have signaled that expansion can continue even if rates rise, curbing the need for haven assets. “The interpretation of jobs has to leave us with the Fed moving by year-end probably, and that has to be supporting the dollar, pressuring gold,” said Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees $133 billion in assets. The net-long position in gold futures and options fell 22 percent to 205 thousand futures and options for the week ended October 4, according to Commodity Futures Trading Commission. It was the biggest drop since the period ended May 24. Short holdings, or bets on price declines, surged by 59 percent, the most since May 2014. What does Goldman Sachs think about this? “Gold’s recent price declines could present a “strategic buying opportunity” that may open up should prices drop substantially below $1,250,” Goldman Sachs Group analysts said. While the decline over the past month has been in line with the bank’s bearish outlook, there could be a case for purchases if the selloff deepens. At the same time, there are still doubts over where the U.K.’s post-Brexit economy is heading. Fallout from the nation’s vote to leave the European Union could spark global malaise, and prompt some investors to seek the safety of bullion. “The EU is kind of digging in their heels now because they don’t want other people to leave, and all of that is going to be positive for gold,” said Adrian Day Asset Management. “But that should also be good for the dollar. Gold has been struggling, and you have a lot of nervous holders of gold and gold stocks.” 

Source: ProFinance