Gold 'to hold its ground even if Fed raises rates'

DBS expects gradual rise in rates to keep gold prices firm

Fear not, gold investors, 2016 is going to be just fine even if United States Federal Reserve chief Janet Yellen jacks up rates, according to South-east Asia's largest bank.

DBS Group Holdings is overweighting bullion heading into next year as it forecasts that the Fed will raise interest rates only gradually, with the cycle peaking at a lower level than in earlier rounds.

The Singapore-based bank has not set a price target, but the bullion outlook is based on expectations of an initial hike in the first quarter.


Buoyed by expectations that the Fed would delay raising rates, gold prices shot up on Thursday, reaching their highest level since June. PHOTO: BLOOMBERG

"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 senior investment strategist Manish Jaradi at DBS' chief investment office.

DBS raised its gold rating to neutral in the second quarter, then turned overweight in mid-August, Mr Jaradi 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 - on Thursday, gold prices shot up to their highest level since June, amid expectations that the hike could be pushed back.

Fed officials delayed raising rates last month amid concerns about global growth and as inflation languished.

At cross-town rival OCBC Bank, top-ranked analyst Barnabas Gan expects gold prices to go lower should interest rates climb.

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

Gold for immediate delivery traded at US$1,176.23 an ounce yesterday in Singapore, according to Bloomberg's generic pricing.

It saw losses last year and in 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 during the financial crisis that ensued.

Dr Yellen said last month that the central bank is prepared to raise rates this year, and that additional increases would be gradual.

The odds of an increase this month stand at 6 per cent, with 30 per cent seeing a move by the year end and 55 per cent by March, futures contracts indicate. 

Higher interest rates could erode the appeal of holding metals that do not offer yields.

The Fed's Beige Book, which was released on Wednesday, showed modest growth and tightening labour markets. 

Federal Reserve Bank of New York president William Dudley said on Thursday that the central bank should still raise rates this year as long as the economy stayed on track, but warned that some recent data could indicate a slowdown.

Mr Gan, ranked by Bloomberg as the most accurate gold forecaster in the third quarter, said the outlook for steady improvement in the world's largest economy would probably prompt the Fed to raise rates, hurting bullion.

Gold is expected to trend lower in each quarter of next year, to average US$950 an ounce in the final quarter, he wrote on Oct 7, based on an outlook for an increase in rates.

If the Fed actually holds back this year, prices could climb, he has said.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on October 17, 2015, with the headline 'Gold 'to hold its ground even if Fed raises rates''. Print Edition | Subscribe