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Market News Gold to fall to $1,750 by year end

Gold to fall to $1,750 by year end

Gold to fall to $1,750 by year end, Firmer USD weighs on gold, but dollar is 'doomed' long-term, says Gundlach. Gold set for fourth weekly gain on dovish Fed rhetoric.

Eden
2021-07-16
746

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Gold prices on Friday were headed for the fourth straight weekly gain, as investors took comfort from Federal Reserve Chair Jerome Powell’s stance that the U.S. central bank would continue to support the economy and inflation will be transitory.


Spot gold fell 0.33% to $1822.74 per ounce by 15:50(GMT+8).


“This stronger dollar narrative that we’re starting to see in the markets is going to limit the upside in gold,” said Stephen Innes, managing partner at SPI Asset Management.


However, gold is finding support from lower real rates and the fact that some elements of the market think the Fed is not really going to push the envelope for rate hikes, Innes added.


Lower interest rates decrease the opportunity cost of holding non-yielding gold, also considered a hedge against inflation that could result from widespread stimulus measures.


Fed Chair Jerome Powell faced sharp questions about inflation and banking regulation in a hearing before the Senate Banking Committee on Thursday, and repeated his pledge of “powerful support” to complete the U.S. economic recovery.


Making gold expensive for holders of other currency, the dollar was headed for its best weekly gain in almost a month.


Economy in China, a leading consumer of gold, grew slightly more slowly than expected in the second quarter, weighed down by higher raw material costs and new COVID-19 outbreaks, fanning expectations that policymakers may have to do more to support the recovery.


Barrick Gold Corp said on Thursday its second-quarter gold production fell 5.4% from the previous quarter, dented by planned maintenance shutdowns at Nevada Gold Mine in U.S. and Pueblo Viejo in the Dominican Republic.


Gold to fall to $1,750 by year end 


The gold market is holding up well, but it faces competition with rising interest rates, a red-hot equity market and resilient strength in the U.S. dollar, according to one market strategist.


In an interview with Kitco News, Marc Chandler, managing director at Bannockburn Global Forex, said that the precious metal has started July off on solid footing, with today being only the third down day in the last 12 days. However, he added that he doesn't see gold prices getting above critical resistance at $1,850 an ounce.


Looking to year-end, Chandler said that he sees gold prices trading around $1,750 an ounce.  He added that gold appears to be stuck in a broader range between $1,500 and $2,000 an ounce.


Chandler pointed out that there is not much new information to drive gold prices higher and the current environment is more conducive to equity markets and the U.S. dollar.


"I'm not so sure that gold serves the same function that people used to think of had as we face a new financial industry of [exchange-traded funds] and passive investing," he said.


Although there are expectations for strong economic growth through the rest of the year, Chandler said that he is not convinced these forecasts will be met. He described the current economic momentum as a sugar high that can't be last.


He added that he already sees signs of the global economy peaking.


"By the second half of next year, when we talk about 3% growth, it will be from the rearview mirror. So if the world is going to slow down towards the end of this year, I have to put gold may be at $1,750," he said.


"I'm not so positive on gold, not because of the debt levels or unsustainable levels of valuation in other asset markets, whether it's house prices or stocks and bonds, but I'm more concerned about a general economic slowdown taking down risk capital in general," he added.


Firmer USD weighs on gold, but dollar is 'doomed' long-term


DoubleLine CEO Jeffrey Gundlach said that gold is getting in its way this year while the broader commodities index is performing better than stocks.


"Interestingly, gold is actually negative this year. Commodities are very strong. Commodities are up more than stocks this year as a basket. But gold can't seem to get out of its own way. And obviously, the dollar being firmer lately is not positive for gold either," Gundlach told CNBC on Thursday.


When it comes to further upside in commodities, Gundlach noted that the rally is near its top.


"My guess, commodities won't break out on the upside. The move has been so linear and so persistent. The dollar has been moderately firmer in the last several weeks, and that will continue. And that would mean that commodity prices should probably be faded at this time," he said.


But there is a key difference between looking at the short-term versus the long-term time horizon outlook for the U.S. dollar. "In the near term, the dollar seems firm. In the longer term, the dollar is doomed," Gundlach pointed out.


A big drop in the dollar is coming in the intermediate-term, the so-called bond king added, citing the size of the U.S. deficit.


"Ultimately, the size of our deficits — both trade deficit, which has exploded post-pandemic, and the budget deficit, which is, obviously, completely off the charts — suggest that in the intermediate-term — I don't really think this year, exactly, but in the intermediate term — the dollar is going to fall pretty substantially," Gundlach said. "That's going to be a very important dynamic because one of the things that's helped the bond market, without any doubt, has been foreign buying, with the interest rate differentials having favored hedged U.S. bond positions for foreign bond investors."


Overall, Gundlach is sticking to his stocks, long-term government bonds, gold, and cash portfolio breakdown.


Gundlach also described the Fed's stimulus situation as a bit of a double-edged sword. "I don't believe the Fed can go cold turkey on stimulus, he said. "If stimulus continues, inflation could get worse. If they take stimulus away, the economy is extremely uncertain."

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