Prepare for gold below US$1,000 as Fed pulls trigger on rates

An employee inspecting a gold bar at a store in Tokyo in 2014.
An employee inspecting a gold bar at a store in Tokyo in 2014.PHOTO: BLOOMBERG

SINGAPORE (BLOOMBERG) - Gold may become a three-figure commodity once again after holding above US$1,000 an ounce for the past six years.

Bullion may slide below that level in the first half of 2016 after the Federal Reserve raises interest rates and the US dollar gains, according to BMI Research, a unit of Fitch Group.

Expectations for gradual tightening will cushion the fall, with prices then returning to trade at about US$1,000 and above, said John Davies, global head of commodities research. The metal was at US$1,077 on Thursday (Nov 19).

Gold has lost about 9 per cent in 2015, dropping to a five- year low, as Fed policy makers prepare to raise borrowing costs for the first time since 2006, curbing the appeal of the metal because it doesn't pay interest. Most investors now expect an initial hike next month, with minutes of the Fed's October meeting, released on Wednesday, strengthening that outlook. Goldman Sachs said last month a December rate rise would probably hurt bullion.

"Certainly US$1,000 will be tested but we're not necessarily thinking that it's going to collapse," Mr Davies said in an interview in Singapore on Wednesday. "A lot of the future rate hike has already been priced in, so once we do see hikes, I don't think there's going to be a sudden knee-jerk reaction."

Gold for immediate delivery fell to US$1,064.55 an ounce on Wednesday, the lowest level since February 2010, according to Bloomberg generic pricing. The metal, which is headed for a third annual decline as investor holdings drop and the dollar appreciates, has averaged about US$1,172 so far this year.

Average prices will decline in 2016 and 2017, and BMI may cut its forecast of US$1,150 for next year, according to Davies, who's predicting a 25 basis point increase from the Fed next month followed by a further 75 basis points of increase over 2016. That's in line with Morgan Stanley's Market Implied Pace of Rate Hikes Index, which suggests the Fed will carry out three 0.25 percentage-point rate increases next year.

"If it was significantly faster than that, or more aggressive, then there could be a much further downside move," said Mr Davies. "Our view on gold prices is based on the expectations there will be very gradual rate hikes next year."

Goldman forecast gold at US$1,050 in six months and US$1,000 in a year as rates climb, according to an Oct 21 report. Renee Haugerud, founder of New York-based hedge fund Galtere, said in an interview on "Bloomberg " this week, bullion may fall to US$900 to US$1,000 because of the rising US dollar.

The minutes of the Fed's October meeting were likely to reinforce expectations of a rate increase next month and drag gold prices lower, Oversea-Chinese Banking Corp said in a note on Thursday. The Singapore-based bank's staff includes economist Barnabas Gan, the most accurate gold forecaster in the third quarter, according to Bloomberg rankings.