Analysts on outlook for gold prices on Fed policy, higher yields

Gold prices recovered slightly from a sharp fall earlier this week, but analysts are still pessimistic on the outlook for the precious metal going forward.

On Sunday evening, gold prices dropped to a four month low of $1,677.9 per ounce. The metal was hovering around $1,740 per ounce Thursday morning trade in Asia, still off its highs earlier this year of around $1,900.

Analysts pegged the fall to a stronger-than-expected U.S. jobs report as well as a rush to buy the dollar in response.

Gold prices and the greenback have an inverse relationship. As the dollar gets stronger against other currencies, gold prices will fall as it becomes more expensive in other currencies, driving down demand. 

“The initial sell‑off in the gold price on Monday was likely triggered by the Asian market buying the US dollar and selling gold in response to the strong US payrolls for July from last Friday,” Vivek Dhar, commodities analyst at the Commonwealth Bank of Australia, said in a note on Wednesday.

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On Friday, the Bureau of Labor Statistics said nonfarm payrolls increased by 943,000 in July, above the 845,000 new jobs forecast by Dow Jones.

While gold has since recovered some losses, Dhar said it was “difficult to remain bullish on the precious metal,” given the hawkish outlook for U.S. monetary policy.

The Federal Reserve is expected to dial back monetary easing and slow its stimulus efforts as the economy recovers from the pandemic. The U.S. central bank has held rates near zero, but officials have signaled that hikes could happen soon, especially with inflation running hot. 

But Dominic Schnider, chief investment officer at UBS Global Wealth Management, predicts that real yields will “go less negative” and that means more downside for gold. He told CNBC’s “Street Signs Asia” on Wednesday he expects outflows from the gold exchange-traded funds and futures markets. 

When real yields go up, gold prices go down, and vice versa. In such a scenario, the opportunity cost of holding gold, a non-yielding asset, is higher as investors are foregoing interest that would be otherwise earned in yielding assets.

“I think you’re going to see a little bit more outflows. I wouldn’t be surprised if we see another, at some point, 20 million ounces leaving the ETF and futures market,” Schnider said. “That means more downside, that’s when … we tell people to hedge your position tactically, or at least sell the upside, get some yield.”

“A stronger US dollar combined with a gradual increase in US 10 [year] real yields suggest that gold prices should trend lower,” Dhar wrote.

He predicts that gold prices will fall to $1,700 per ounce by the first quarter of 2022. Schnider forecast that gold could see drops to $1,600 per ounce or lower.

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