Gold rally seen by capital economic- once we’re over the Fed

London (Sept 16)  While a U.S. rate rise, possibly this week, will hurt bullion near term, once liftoff is out of the way improving fundamentals for gold will propel prices to about $1,200 an ounce by year-end and $1,400 in 2016, commodities economist Simona Gambarini said. Spot prices traded little changed at $1,105.31 at 11:38 a.m. in Singapore after ending 0.3 percent lower on Tuesday, the fourth day prices moved less than 0.5 percent at the close.

“There’s going to be a negative reaction in the very short term, in the month or weeks following the rate hike,” London- based Gambarini said in an interview. “Once that has been digested and it’s gone, then investors will get back into the gold market.”

Financial markets including precious metals are in thrall to the Federal Reserve this week, with policy makers starting a two-day meeting on Wednesday that may see them agree to the first increase in rates since 2006. Bullion’s lost 11 percent over the past year as prospects for tighter U.S. monetary policy lifted the dollar and investment holdings fell. Capital Economics puts the chance of a rise this week at 50 percent compared with odds of 32 percent based on futures data compiled by Bloomberg.

‘Buying the Dip’

“The cumulative improvement in the economy over the past few years means that it is almost impossible to justify interest rates still being at near-zero,” Gambarini said. “Probably there will be quite a bit of investors buying the dip after the Fed hikes.”

Prices are seen rising into next year on improving fundamentals for bullion, supported by central-bank purchases led by China and Russia, lackluster supply and the possibility of improved investment demand, according to Gambarini. Should the forecast for a gain to $1,200 at the end of December prove accurate, that would be the first annual increase for gold since 2012 after a 1.4 percent loss last year and 28 percent slump in 2013.

In July, the People’s Bank of China updated data on its holdings for the first time in six years, saying bullion reserves increased 57 percent to a record, and followed that with a further monthly increase. Central-bank buying accounts for as much as 15 percent of global demand, Gambarini said.

Citigroup’s View

Gold prices will take a hit if the Federal Reserve decides to raise rates at the September meeting, David Wilson, an analyst at Citigroup Inc., said by phone from London. An increase would boost the dollar, curbing the appeal of gold as the metal doesn’t pay interest like assets such as bonds. The bank’s economists think there will be a hike this week, Wilson said.

“We’re not exactly gold bears, we’re just not bulls,” Wilson said. “There’s still some risk reasons out there to hold gold, but generally the key driver for gold for most of this year, with one or two weeks of exceptions, has been that inverse relationship with the dollar.”

Bullion of 99.99 percent purity lost 0.3 percent to 227.30 yuan a gram ($1,110.33 an ounce) on the Shanghai Gold Exchange. Platinum for immediate delivery fell 0.6 percent to $957.20 an ounce, while palladium dropped 1 percent to $597.40 an ounce. Silver declined for a fourth day, losing 0.4 percent to $14.3625 an ounce.

Source: Mineweb