In its latest UBS Precious Metals Daily note, Tully and Teves explain that for most of this year, there has been a great deal of consensus and a lack of aggression among investor views, on the US economy, and as a result, gold’s use as a macro barometer this year has been an under-utilised tool.
But, they say, that looks set to change. “The recent strength of the US dollar as seen through the DXY and an increasing focus on Fed normalisation suggests that gold's direction is going to be far more determined by macro factors up ahead than it has been all year, and increasingly so versus other gold price influencing variables such as physical demand.”
For much of this year, UBS says, the yellow metal's direction has been determined more by technicals, positioning and momentum, albeit from a rather depleted investor pool, but now the market’s focus is increasingly on exactly when the Fed will decide to raise interest rates and, as a result, “this should mean that gold becomes a useful indicator to the investor and spec community once again”.
But, just because its predictive powers look set to return, that doesn’t mean that the price of the metal is likely to increase dramatically.
As UBS points out: “There has been much discussion in recent days as to whether the FOMC will move away from the language of its previous statements, specifically the "considerable time" reference to further rate hikes. A departure from this formula, even if an alternative time period isn't offered, in our view would be interpreted as a hawkish move and spell bad news for gold.
“The US dollar has potentially much more room to the upside should positive US factors start to emerge. This is a key risk for gold. A hawkish tone to the Fed next week we believe would give the USD considerable steam to the upside. That's an obstacle gold can't surmount,” Tully and Teves warn.
The two analysts are also of the view that while the typically negative relationship between US 10 year Treasury yields and gold has broken down a number of times over the course of the year to date, this month that traditional relationship has resurfaced and, as US yields have been rising, this has weighed on gold.
“We expect this negative relationship to continue and garner a good deal of attention,” the analysts said.
