UOB Commodities’ head of markets strategy, Heng Koon How, has upgraded his forecast for gold to “positive” from “neutral” as the price of gold jumped above US$2,000 ($2,727.45) per oz.
The price surge came after US president Joe Biden announced the ban of Russian oil imports to the US on March 8.
According to Heng, the surge in the price for gold came very close to the all-time high of US$2,072 per oz that was seen in August 2020.
"Concurrently, there are renewed in-flows to gold ETFs. Purchases of gold jewellery from individual investors will likely intensify alongside global central bank diversification of their reserves into gold,” writes Heng in his March 9 note.
On the back of the growing gold price, Heng has raised his estimates for gold prices to reach US$2,100 per oz for the 2QFY2022. For the 3QFY2022, Heng has estimated that gold prices will reach US$2,150 per oz. Prices are expected to hit US$2,200 per oz in the 4QFY2022 and 1QFY2023, he adds.
In addition, the renewed pull-back in US real yield is likely to support the growth in gold prices further, says Heng.
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At the same time, prices for Brent and WTI crude oil rallied, pushing above US$130 per barrel and US$125 per barrel respectively, after the UK announced that it will phase out imports of Russian oil by the end of 2022.
Amidst the on-going rally in prices for energy and commodities, there is a mounting fear of stagflation amongst global investors, notes Heng, who adds that the on-going rise in energy and commodities prices will be “keenly felt” in economies across the world.
“This mounting stagflation fear, coupled with strong safe haven in-flows have now taken over as the dominant drivers for gold price, muting the negative impact from the anticipated rate hikes from the US Federal Reserve,” he observes.
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Prior to the recommendation upgrade, Heng writes that he was “reluctant” to raise his gold forecast due to the expectations of the upcoming cycle of rate hikes by the US Federal Reserve.
Citing his report dated Feb 24, Heng previously noted the dilemma that “near term safe haven demand may fuel spike in price” but “given that gold does not generate any yield, in the face of such a strong anticipated rise in interest rates, it is difficult for gold to stage a sustainable rally.”
“Back then, we left our forecast at neutral, but ‘acknowledge the gradual recovery in demand and therefore we raised our quarterly price forecast throughout 2Q, 3Q and 4Q2022 from US1,800 per oz to the new trading range of US$1,900 to US$2,000 per oz,” he adds.
“That view is now outdated. Over the past two weeks, as Russia’s invasion of Ukraine continued, the entire commodities complex has staged an unprecedented rally. Key commodities across the energy, industrial metal, agriculture, grains and bulk complexes have all rallied significantly.
Prior to Russia’s invasion, gold was trading at around US$1,900 per oz.
At this stage, Heng notes that there is elevated uncertainty.
“While unlikely, a sudden ceasefire between Russia and Ukraine could improve sentiments dramatically and trigger a retreat in gold prices. Similarly, a very hawkish outcome at the upcoming March 15 and 16 Federal Open Market Committee (FOMC), may trigger a larger-than-expected rise in rates that will weigh down on gold as well,” he writes.
“Currently, futures have priced in a lower 25 basis point (bps) rate hike from the FOMC, from 50 bps rate hike expectation prior to the onset of war”, he adds.
Photo: Bloomberg
