London — Gold is unlikely to recapture the $1,400/oz level without increased financial market volatility and weakness in the US dollar, senior HSBC precious metals analyst Jim Steel said Monday.
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"That is a nice top end [$1,400/oz] where you would have to see some real change in the financial markets [to generate that kind of rally], and a weaker dollar would have to be the case," Steel said during a presentation at the LME Seminar, held annually in conjunction with LME Week.
But HSBC expects the dollar to gain strength as the US Federal Reserve raises interest rates this year and next, Steel said.
HSBC expects gold to average $1,274/oz in 2018 and $1,292/oz in 2019. COMEX gold for December delivery closed at $1,205.50/oz Friday.
The lack of volatility in equities and fixed income assets last year resulted in similarly low volatility in the gold market, Steel said.
"With this aging equities rally globally, if we do get some financial market uncertainty, I think gold's likely avenue for a rally will be through a rise in volatility," he said, pointing to events during the first half of 2018 that prompted a jump in gold prices.
Though trade sanctions and tariffs have raised uncertainty in broader financial markets, gold has not benefited from its status as a safe-haven investment this year, Steel said.
That is because investors have turned to US Treasury notes in anticipation of rising US interest rates this year and next.
"US equities have gone up, there has been a flight of cash into US Treasuries and that has kept US interest rates relatively low, despite the fact that the Fed [Federal Reserve] has tightened the front end of the curve," Steel said.
"That has resulted in a stronger US dollar, and that has weighed on gold."
Another reason for the lackluster performance in gold this year is that international trade remains strong, despite tariffs by the Trump administration on Chinese imports and corresponding retaliatory tariffs from China, he said.
"In actual fact, trade is still bumping along," Steel said. "If you think that eventually the forces of anti-globalization will wear trade down to no growth, then the gold market is likely to do well."
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--Edited by Jonathan Loades-Carter, firstname.lastname@example.org