• Gold benefitted from falling interest rates

• Investors seeking shelter

• Gold outlook still positive

• Trade ‘ceasefire’ is a major near-term risk for gold

• Technical picture

Gold, the world’s oldest safe haven, recorded extraordinary gains lately, as the ‘perfect combination’ of falling interest rates, a declining dollar, and general risk aversion amid recession and geopolitical fears fuelled the rally. Given that these forces seem unlikely to abate anytime soon, the outlook for gold remains bright, with the key risk to this view being a potential trade ‘ceasefire’ that calms markets down.

The global economy is clearly losing momentum, with uncertainty emanating from trade tensions holding back business investment and hence posing downside risks for future growth. The result is that major central banks including the Fed and the ECB have once again taken it upon themselves to support this expansion, declaring recently that they stand ready to add more stimulus if the situation does not improve soon.

Accordingly, interest rates are falling across the world as investors position for looser monetary policy, which is increasing gold’s appeal. Bullion does not pay any interest to hold, so the lower rates go, the more attractive it becomes in comparison to interest-bearing assets like bonds. Indeed, the correlation (inverse) between movements in short-term US bond yields and gold prices has been surprisingly strong lately.

Meanwhile, the dollar has lost some of its shine, which is also a positive for the yellow metal. Since gold is typically denominated in dollars, the two have an inverse relationship, with a weaker US currency making gold ‘cheaper’ for investors using foreign currencies – hence increasing its demand.

Source: BIMB Securities Research - 24 Jun 2019