INTERVIEW: Mechanisms Not In Place To Push Gold Higher: BMOINTERVIEW: Mechanisms Not In Place To Push Gold Higher: BMO
The selloff in gold could get worse before investors jump back into the marketplace, said Jessica Fung, commodity strategist at BMO Nesbitt Burns Inc.
Uncertainty regarding the Federal Reserve’s $85 billion monthly bond-purchase program, weak global growth and a strong U.S. dollar will continue to put downward pressure on gold,Fung said.
“I think people want prices to improve but the mechanisms that are needed aren’t in place,” she said. “There are more catalysts that will drive prices lower. With the anticipation of rising interest rates and inflation not going anywhere, it is hard to see how gold prices will rise.”
In the near-term Fung expects prices to trade in a fairly narrow range between support at $1,200 an ounce and resistance at $1,250.
Although markets are focused on the prospect that the Federal Reserve will start to tap the breaks on its $85 billion bond-purchasing program, Fung said with so much uncertainty in the marketplace she is surprised gold prices are not higher as investors should start to look for an insurance policy.
Fung added that she thinks it is too early to talk about an exit strategy; instead of focusing on interest rates next year, markets should be focused on the next three months.
As an example, she said gold should have rallied on Wednesday as a result of the U.S. government’s downward revision to first quarter gross domestic product. The data showed that in the first three months the economy only grew by 1.8%, after an initial print of 2.4%. Despite the news, Comex August gold futures ended the day at $1,229.80, a nearly three-year low. As of 1:30 p.m. EDT, August gold was trading at $1,212.40.
She said the recent price movement demonstrates that markets are betting on a stronger U.S. economy compared to Asia and Europe, which is helping the U.S. dollar and equities and dragging down gold prices.
“Everyone wants to double down on negative news for gold and ignore positive news for gold,” she said.
The key to near-term gold prices will depend on movement in the U.S. dollar, said Fung. She added that the U.S. dollar is strong because of renewed weakness in Asia, European and emerging markets; as long as the U.S. dollar is strong investors will not have an incentive to move into other investment vehicles.
“I don’t think it will take much to push gold lower. We just need to see a bit of weakness in Europe and Asia and then slightly better news in the U.S. and the dollar will go up and gold will go down.”