Gold price drops, but market watchers remain bullish

Gold bullion is displayed at Hatton Garden Metals precious metal dealers in London, Britain on July 21.
Gold bullion is displayed at Hatton Garden Metals precious metal dealers in London, Britain on July 21.PHOTO: REUTERS

The gold price is heading for its first monthly drop since May as the spotlight refocuses on the next United States interest rate hike.

But market watchers are still bullish on the precious metal given its safe-haven qualities amid continuing global economic uncertainty.

The gold price - about US$1,325 an ounce as at last Friday - is down 0.8 per cent this month, as the commodity retreats from its high this year of US$1,373 in early July following Britain's shock vote to leave the European Union.

A report by The Financial Times noted that this price easing marks a sharp contrast to the first half of the year, when investors bought 66 per cent more gold via exchange-traded funds than in the whole of 2015, according to Bank of America.

Still, Phillip Futures senior business development manager Dickson Woon believes now is a good time for investors to get into gold.

"More and more central banks have cut interest rates to negative, and we foresee that the global economic outlook will continue to be gloomy. As a safe-haven asset, gold tends to perform well in economic uncertainty," Mr Woon told The Straits Times. "Based on this year's performance, gold prices have already risen 25 per cent. There is still some room to go until the historic peak of US$1,924 that we saw in 2011, which means there is potential for investors and traders to gain from trading gold."

Since May, Phillip Futures has been offering investors gold bars or dollar notes when they trade spot gold or silver with the brokerage.

For example, an investor trading 25 lots or 100 ounces of regular spot gold and 25 lots or 5,000 ounces of regular spot silver in one month will be able to receive one gram of premium gold. A regular-sized contract comprises 100 ounces for spot gold and 5,000 ounces for spot silver. The deal, not available to financial institutions and futures commission merchants, will end on Dec 31.

Mr Woon said that spot gold or silver is traded on a leveraged basis, which means investors are allowed to trade without putting up the full sum, and so they get exposure with minimal capital outlay.

He added that the company is looking to launch smaller contract sizes, such as in one ounce for spot gold and 50 ounces for spot silver, to make it more affordable for investors to trade gold.

Mr Wayne Gordon, executive director at UBS Wealth Management, acknowledged that gold prices continue to be vulnerable to short-term setbacks, particularly the US Federal Reserve's decision on interest rates as its tone turns more upbeat.

But he added that gold remains an "attractive long-term insurance asset", given the negative to low real interest rate environment globally.

OCBC Bank economist Barnabas Gan believes gold will still rally even with higher interest rates. He noted in a recent report that the full-blown fallout of the Brexit vote has yet to materialise, while the upcoming US presidential election in November remains a wild card.

"As such, despite our expectation for the Fed to hike rates, we think that sustained risk aversion from the suspense will continue to lift gold demand on safe-haven demand."

Mr Gan expects gold to hit US$1,350 an ounce by the end of the year on one rate hike, or US$1,400 if the rate hike does not happen.

A version of this article appeared in the print edition of The Straits Times on August 29, 2016, with the headline 'Gold price drops, but market watchers remain bullish'. Print Edition | Subscribe