Futures & Commodities

Why the gold price might be set for a rebound

An employee arranges one kilogram gold bars for a photograph in Bangkok, Thailand, on January 13, 2016.
Dario Pignatelli | Bloomberg | Getty Images

Gold prices have been under pressure ever since the rally in global stocks and dollar following Donald Trump's victory in the U.S. elections. But a report from UBS says that investors are scaling back optimism that emerged shortly after the U.S. elections, and this is reflected in the recovery of gold prices.

"We think this is warranted and see room for gold to extend upwards as markets digest uncertainty around U.S. fiscal policy. But gold has also recovered considerably and market uncertainty at this point could encourage investors to lock in whatever profits they can for now, especially as seasonal gold demand fades," UBS said in a note.

With the Lunar New Year holidays starting in China on Friday and markets closed next week, demand for gold will see a decline, the report said. Gold prices have drifted down a bit ahead of the Chinese festival. The precious metal is trading nearly 8 percent higher over a 12-month period but is down more than 6 percent since the U.S. elections.

"We think gold's performance, as the typical Q1 seasonal demand fades, should provide a good gauge of investor sentiment towards gold at this point."

A man counting gold bars.
Akos Stiller | Bloomberg | Getty Images

Earlier this week gold prices hit two-month highs buoyed by a weaker dollar and uncertainty surrounding President Trump's policies. UBS in its research note said from a short-term perspective gold has already recovered considerably, with over 5 percent of gains so far in 2017. But the growing weakness in the U.S. dollar could push gold prices higher. Last week President Trump's shocking comments that the dollar is too strong sent the greenback tumbling to a six week low.

However, similar to currencies, gold too has seen highs and lows in 2016 with events such as the U.K.'s decision to leave the European Union and U.S. elections. While many analysts have said gold can reach $1,300 per ounce this year, the asset class continues to remain under pressure.

Meanwhile, other commodities are also expected to see a rise in price due to political uncertainty. That's according to Koen Straetmans, senior strategist multi-asset at NN Investment Partners.

Straetmans explained although political uncertainty would weaken economic growth and demand for commodities, it would disrupt supplies and raise prices.

"Increased geopolitical risk or an increase in protectionism could just as easily lead to commodity supply disruption, sending prices higher in the near term despite negatively impacting commodity demand, too."

A number of analysts have said that Trump's fiscal push on infrastructure will be great for commodities.

"Over longer periods, correlation between broad commodity prices and policy uncertainty is low to slightly negative. Exceptions include precious metals with a more pronounced positive correlation, and a strong negative correlation with the energy segment," Straetmans said.

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