Interest rate hikes by the United States Federal Reserve, widely expected to start this month, will strengthen the US dollar and drive down gold prices to a multi-year low of US$950 an ounce by the end of next year, OCBC has predicted.

Gold price volatility this year has tracked the possibility of rate hikes, said OCBC economist Barnabas Gan in a media briefing yesterday.

Gold is widely regarded as a safe-haven asset . It is also used by investors as a hedge for a weak US dollar.

Given that the US economy is recovering fairly well, OCBC expects the Fed to raise rates by 0.25 percentage point this month, followed by four hikes of the same magnitude in each quarter next year.

The main Fed cash rate has been near zero for almost a decade in the wake of the global financial crisis.

The rate hikes are set to strengthen the US dollar, causing gold prices to drop perhaps to US$1,050 an ounce by year-end, then sliding by US$25 an ounce with each rate hike, eventually hitting US$950 an ounce by the end of next year, Mr Gan said.

While OCBC is bearish on gold, it is bullish on crude oil. This is despite downgrading its forecast for US benchmark West Texas Intermediate from US$55 to US$50 by the end of next year, and cutting the Brent forecast from US$60 to US$55 for the same period.

Mr Gan expects the narrowing of the oversupply of crude oil to start in the second half of next year, with a fully balanced oil market emerging in 2017 or 2018.

Oil supply from the US could fall to as low as eight million barrels a day next year, down from 9.2 million barrels a day this year.

Mr Gan also predicts that Opec will reintroduce the production ceiling of 30 million barrels a day at its June meeting next year, addressing the issue of oversupply.

Chong Koh Ping