SINGAPORE: Against the backdrop of a resurgent US dollar, gold is set to lose more of its lustre in 2016, analysts said.
The outlook for the precious metal has turned increasingly bearish ever since the US Federal Reserve announced its first interest rate hike in nearly a decade on Dec 16. Gold prices crashed to a six-year low of US$1,049 per ounce the very next day (Dec 17). Even though prices recovered to US$1,073 as of early Thursday (Dec 24), many analysts are still tipping the yellow metal to fall below US$1,000 next year.
“As the US dollar strengthens and interest rates in the US go higher, I think gold is going to lose some of its shine. We see prices heading towards the US$1,000 per ounce mark or even lower than that in 2016,” said Mr Vasun Menon, vice president of Wealth Management at OCBC Bank.
A firmer US dollar tends to put pressure on gold prices, which is priced in the US currency and becomes more expensive to buyers located outside the US. In addition, with gold being viewed as an alternative investment to the dollar, it is usually shunned when the greenback strengthens in value.
Most analysts expect the Fed to roll out four rate increases over the course of next year, with the next rate hike likely to take place in March. Further tightening of US monetary policy will push the greenback even higher.
“We are fairly constructive on the US dollar given that the rate cycle in the US is quite the opposite of the rate cycle in the rest of the world. That's going to put downward pressure on gold prices and a break below US$1,000 is potentially in store,” Mr Seamus Donoghue, CEO of Allocated Bullion Solutions, said.
Analysts also expect sluggish demand to exacerbate the decline in precious metal prices.
According to Phillip Futures’ investment analyst Mr Daniel Ang, interests in gold as an investment tool is likely to wane amid a rising US dollar, while a slower-growing China continues to crimp jewellery demand from one of the world's two biggest markets.
Even as lower gold prices attract some bargain hunters, such demand will not be enough to support prices for long.
“We expect some support for gold prices to come from retail investors who move in on discount buys. Early in the year, we expect to see the Chinese support the market during Chinese New Year. They would likely pass the baton to India where demand is expected to kick in towards the end of the year,” Mr Ang said.
“But we do not think that this is enough to warrant an increase in gold prices. If gold does not gain back its safe haven appeal, it is likely that prices could fall further.”
Phillip Futures expects gold to settle near US$985 per ounce by the end of 2016. If that happens, it would mark the precious metal’s lowest level since 2009.