This Is Not ‘A New Dollar Bull Market’

(May 22, 2018 - by Anna Golubova)

Gold to Outperform Against Other Currencies

The current U.S. dollar rally is not a sign of a new bull market, said ICBC Standard Bank, adding that gold is still expected to outperform against other currencies.

“We expect gold to outperform against other currencies and do not see this latest move as the beginning of a new dollar bull market,” ICBC Standard Bank analyst Marcus Garvey said in a report published on Monday. “Moreover, physical flows and safe haven buying remain supportive, helping to limit downside risks.”

In the short term, traders can expect to see continued downward pressure on gold as the U.S. dollar remains strong. “The DXY dollar index has staged a sharp 5% rally over the past six weeks, putting precious metals under significant near-term pressure,” Garvey wrote.

Gold’s downward move out of this year’s $1,300-$1,365 trading range opened the precious metal up to new low levels between $1,235 and $1,260, the analyst pointed out.

“In the short-term, there are reasons to expect further dollar strength and, consequently, pressure on gold prices,” Garvey said.

ICBC’s outlook is based on the assumption that the current U.S. dollar strength is a cyclical move rather than a structural one.

“To take a more positive structural view on the dollar we would need to see this dynamic shift, with a justification for higher equilibrium U.S. interest causing the [yield] curve to steepen. The issue, however, is that U.S. growth is already late in its cycle and, crucially, has been driven more by debt financed consumer spending than corporate investment,” said Garvey.

Gold prices will continue to receive support from geopolitical risks, including the potential of Italy’s anti-establishment parties forming a government, U.S.-China trade negotiations as well as tensions surrounding the Middle East and North Korea, according to ICBC. “Geopolitical risks … encourage inflows to defensive safe haven assets,” noted Garvey.

At the same time, dollar strength will also help boost gold demand in emerging economies.

“While gold is clearly struggling in dollar terms, the spill-over from dollar strength to weaker emerging market currencies also stimulates physical buying of gold as investors in these countries seek to hedge currency weakness and higher domestic inflation,” Garvey explained. “To take the examples of Turkish Lira and Indian Rupee – where oil’s rally is also adding to the prospect of increased inflation – gold’s year-to-date performance has been respective appreciations of 19% and 6%.”

Gold prices erased all daily losses after dropping to a five-month low in early U.S. action on Monday amid upbeat investor risk appetite. June Comex gold futures were last trading flat on the day, up 0.08% at $1,292.30.