Too soon for gold bulls to start pawing the ground? | Reuters - Firstpost
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Too soon for gold bulls to start pawing the ground? | Reuters

Updated: Feb 5, 2016 00:30 IST

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LONDON Gold bulls are starting to rear their heads with the price of the precious metal hitting three-month highs, but their optimism could be premature due to uncertainty over U.S. interest rates.

Spot gold hit $1,155.30 an ounce on Thursday, its highest since Oct. 29 on buying triggered by a tumbling dollar after weak U.S. data and on perceptions that U.S. interest rates could be lower this year than previously expected.

Prices are up around 8 percent so far in 2016 after three years of losses.

"If you are a gold bull, it's encouraging and if you are a bear, it's worrying. The question is whether the dollar's losses are the start of a trend," said Societe Generale's head of metals research Robin Bhar.

"Let's see how gold performs over the rest of this quarter, see if the buying pushes it up to the $1,200 level."

Gold was last above $1,200 in June 2015 when equity market volatility sent investors scrambling for safety.

Gold typically rises when the dollar slides and falls when the dollar rises. The link is with interest rates, which when they rise also push up the opportunity cost of holding the metal, which earns no yield and costs money to store and insure.

Against a basket of currencies, the greenback fell to a three-month low of 96.259 in the aftermath of New York Fed President William Dudley's warning that a weakening outlook for the global economy would have to be taken into account for upcoming rate decisions.

"We don't think this recent strength in gold is sustainable, this could be a false dawn," Capital Economics commodities analyst Caroline Bain said. "We're relatively positive on the end-2016 outlook for gold, but we're not going to say gold is going to strengthen now."

Gold's prospects will depend on U.S. data, starting on Friday with the non-farm payrolls, used as a gauge of the health of the U.S. economy and prospects for Fed rates.

Analysts say the market is pricing in a lower probability - about 60 percent - of a 25 basis point rise in benchmark U.S. rates this year.

The Federal Reserve last December raised benchmark interest rates for the first time in nearly a decade by a quarter of a percentage point to between 0.25 percent and 0.50 percent.

"We know the Fed wants to tighten and that's the baseline we should use to determine our expectations," Cazenove Capital Management Chief Investment Officer Richard Jeffrey said.

"The Fed will probably not tighten if volatility remains extreme, but I would be surprised were we not to see one or two more rate increases in the U.S. and who knows if the situation changes, it could press ahead more quickly then that."

(Additional reporting by Eric Onstad; editing by Susan Thomas)

This story has not been edited by Firstpost staff and is generated by auto-feed.

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