Gold’s top forecaster sees prices sinking amid three Fed hikes

SINGAPORE – The Federal Reserve will probably raise rates in December and twice more in 2017, boosting the dollar and hurting gold, according to Singapore-based Oversea-Chinese Banking Corp., the most accurate bullion forecaster in the third quarter.

Gold will retreat each quarter next year, dropping to $1 100 /oz in the final three months of 2017, Barnabas Gan, an economist at the lender, wrote in a commodities report. The metal for immediate delivery traded at $1 266.74 /oz on Wednesday, about 15% above the target for the end of next year.

Bullion’s advance this year came as the Fed stayed its hand on raising borrowing costs after an initial increase last December, and the UK’s vote to quit the European Union bolstered demand for a haven. Federal Reserve Bank of St. Louis President James Bullard told reporters this week that the December meeting is the most likely for an increase, adding to expectations a hike is imminent. A gauge of the US currency is trading near the highest since March.

“Going by the central bank’s goal of achieving maximum employment and stable prices, recent data seems to be in-line in achieving the Fed’s dual-mandate goal,” Gan wrote. He was the most accurate gold forecaster in the third quarter, according to data compiled by Bloomberg. “With the strong correlation gold has with the dollar, the likely higher interest rate environment and the consequent firmer greenback should underpin a bearish case for gold next year.”

Gold futures for December delivery fell 0.5% to settle at $1 266.60 /oz at 1:45 p.m. on the Comex in New York, the second drop in three days.

The odds of a rate hike by the Fed in December, as seen by investors, have jumped in October. The chances of a move at the policy makers’ final scheduled meeting of the year are now at 73%, up from 59% at the start of the month, according to futures tracked by Bloomberg.

MOBIUS'S OUTLOOK
OCBC’s view for a weaker gold price contrasts with the outlook from Mark Mobius, executive chairman at Templeton Emerging Markets Group. Bullion is set to advance next year as the Fed goes slow on increasing rates and the dollar remains subdued, Mobius told Bloomberg News in an interview last week.

In his forecast, Gan acknowledged “wildcards” that could bolster gold’s appeal as a haven, with the outcome of the US presidential election in November topping the list, as well as the possible impact next year of the UK’s invoking Article 50 of the Lisbon Treaty, which will put Britain on a path out of the EU. In the US contest, Hillary Clinton is facing off against Donald Trump, with polls showing a probable victory for the Democrat.

For the remainder of 2016, “the suspense given the US presidential election alone should be enough to support gold,” Gan wrote, putting bullion at $1 300 /oz in the final quarter of this year. Still, apart from a quick and sudden deterioration in investors’ risk appetite, the sustained likelihood of the Fed boosting rates will hurt gold in 2017, he said.