A dovish Fed has rekindled investors’ love for gold, but this love could be changing. Depressed US real yields and resumption of USD weakness have helped gold regain most of this year’s losses since March lows.
Depressed real yields have rekindled the love for gold, but this love could be changing
Source: Bloomberg, Bank of Singapore
Gold seems to have also benefitted from Bitcoin’s recent decline. More than a week after the 19 May crypto crash, investors appear reluctant to buy the crypto dip. This is set to test Bitcoin’s ‘store of value’ proposition as digital gold.
Investors perceive both gold and Bitcoin as offering protection against USD debasement, but the role of Bitcoin remains highly contested whereas gold’s place in an investment portfolio is much better understood. The sharp rise in Bitcoin's volatility could reduce the attractiveness of digital gold versus traditional gold in institutional portfolios.
Gold may yet again overshoot and linger slightly above USD1900/oz in the near term, especially if the May US non-farm payroll comes in lacklustre relative to increased expectations in recent days.
However, the risk is still tilted towards lower gold prices by end-2021. We target gold at USD1800/oz in a year’s time. Despite the recent strength in gold on the back of a dovish Fed and crypto crash, our view remains that gold will find it increasingly hard to shrug off Fed taper talk even if a taper tantrum is avoided. Risks of a tone shift from voting members of the Federal Open Market Committee are rising. There has been a rising chorus of Fed governors who think it is time to start discussing the timetable for policy exit. Risks are growing that the Fed will officially start to talk about talking about tapering soon.
US real yields could move higher towards year-end amid a more positive macro backdrop, which should weigh on gold. History shows that over time, the price of gold closely tracks real US bond yields. Gold still has a place in investor portfolios, but allocations are likely to be smaller than before, as tactical gold positions that had been put on over the past few months could unwind.
We prefer industrial commodities to gold as inflation hedges. Industrial commodities like oil and copper offer a positive carry, which add to their appeal as inflation hedges compared to no-yield commodities such as gold.
Silver trades directionally with gold
Source: Bloomberg, Bank of Singapore
Silver looks set to benefit from rising industrial demand, with the pickup in global economic growth particularly beneficial to silver. Auto, solar power, chemicals and the key electrical and electronic sectors should grow in line with the economic recovery and boost silver demand. But silver is, first and foremost, a precious metal and its industrial metal status is secondary. We expect silver to continue taking direction from gold – downside risks in the latter are likely to weigh on silver’s medium-term outlook.
