Why a stronger US economy would be inconvenient for gold
UBS’s latest daily precious metals note offers some interesting food for thought in terms of the outlook for gold prices over the short term.
Posted: Friday , 25 Jan 2013
GRONINGEN (MINEWEB) -
According to UBS, the prospect of a stronger US economy is currently gold’s biggest risk.
Writing in its latest Precious Metals Daily note, the bank said that “with US economic data holding up of late, if not beating consensus, the prospect of a stronger US economy is certainly gold’s biggest risk right now – not only from a perspective of dollar strength, but more importantly because of the impact this would have on monetary policy expectations.”
Of course, the likelihood that the US economy is out of the woods, or indeed, even on the right path through the thicket is by no means a certain one, a point UBS makes clearly but it says, “the market is currently determined to stay optimistic, and as long as US data holds up, gold will be prone to downward pressure.”
It writes, “Gold’s struggle to bounce highlights the current lack of conviction and faltering sentiment, which is being threatened further by an improving global growth outlook. The continued improvement in US weekly jobless claims data released yesterday only added to market heaviness and concerns that US economic growth is getting back on the right track.
The second reason prices of the yellow metal have been capped of late, UBS says, is that there remain no obvious drivers that would push gold through $1,700.
“The market is in need of a fresh set of catalysts to offer guidance and a clearer sense of direction,” the bank writes.
In the longer term, however, UBS does say that, according to its economists, if the US does see better economic performance, there could well be some scaling back in the magnitude of the Fed’s monthly asset purchases later in the year.
“But at the same time, these economists think that the Fed’s 6.5% unemployment target is too high a trigger for raising short-term interest rates. And with the voting FOMC set to become more dovish this year, we see no significant change in the monetary policy environment: accommodative policy is still expected to remain in place for some time, a scenario that continues to be conducive for higher gold prices.”
All that said, there is no getting away from the volatility present within both the market and the political situation currently and, UBS adds as a caveat, that any negative surprises in the US economy “should elicit a much larger upmove given the level of market optimism, and especially with market positioning remaining relatively light, under 20moz.”