Don't fear the Fed: DBS makes case for gold as rate rise looms

Fear not gold investors, 2016's going to be just fine even as Janet Yellen pulls the trigger on interest rates, according to DBS.
Fear not gold investors, 2016's going to be just fine even as Janet Yellen pulls the trigger on interest rates, according to DBS.PHOTO: ST FILE

SINGAPORE (BLOOMBERG) - Fear not gold investors, 2016's going to be just fine even as the Federal Reserve's chair Janet Yellen pulls the trigger on interest rates, according to South-east Asia's biggest bank.

DBS Group Holdings is overweight bullion heading into next year as it forecasts the Federal Reserve will raise US rates only gradually, with the cycle peaking at a lower level than earlier rounds. While DBS has not set a price target, the bullion outlook is based on expectations of an initial hike in the first quarter.

"A gradual hiking path by the Fed, and the general view of eventually lower US rates, compared with previous cycles, are positive for the yellow metal," said Mr Manish Jaradi, senior investment strategist at DBS's Chief Investment Office. DBS raised gold to neutral in the second quarter, then turned overweight in mid-August, he said in an e-mail.

Gold investors are fixated on when the US central bank will start to raise borrowing costs for the first time since 2006, with prices gaining to highest level since June on Wednesday (Oct 14) amid expectations the increase may be pushed back. Fed officials delayed raising in September amid global growth concerns and as inflation languished. DBS's stance contrasts the view from cross-town rival Oversea-Chinese Banking Corp., where top-ranked analyst Barnabas Gan sees lower prices should rates climb.

"As higher rates are inevitable, the question is whether economic weakness terminates the rate-hiking cycle far quicker than expected," Mr Jaradi said.

Gold for immediate delivery traded at US$1,183.15 (S$1,636.89) an ounce at 8.57am Sydney time, according to Bloomberg generic pricing. It is little changed in 2015 following losses in 2014 and 2013, when investors' holdings shrank and buoyant equity markets lured away funds.

The Fed's last cycle of tightening started in 2004, with rates topping out at 5.25 per cent in 2006 and lasting into 2007 before being pushed to near zero amid the financial crisis. Ms Yellen said last month the bank is prepared to raise this year and additional increases will be gradual.

The odds of an increase this month stand at just 4 per cent, with 27 per cent seeing a move by year-end and 49 per cent by March, futures contracts indicate. Higher interest rates can erode the appeal of holding metals that do not offer yields. The Fed's Beige Book issued on Wednesday showed modest growth and tightening labour markets.

For OCBC's Mr Gan, ranked by Bloomberg as the most-accurate gold forecaster in the third quarter, the outlook for steady improvement in the largest economy will probably prompt the Fed to raise, hurting bullion. Gold is seen trending lower in each quarter of 2016 to average at US$950 in the final quarter, Mr Gan wrote in on Oct 7, based on an outlook for an increase in rates. If the Fed actually holds in 2015, prices may climb, he said.