LONDON (Reuters) - Gold bulls hoping an anticipated rise in U.S. interest rates will paradoxically boost the metal’s price might just be disappointed, as the wider environment offers little to justify a rebound.
Gold has fallen 10 percent so far in 2015, hitting its lowest in nearly six years largely on speculation that monetary policy will tighten. In theory, higher interest rates weigh on bullion by lifting the opportunity cost of holding such a non-yielding asset.
While expectations of a rate rise have driven selling, some bulls say it is so well priced into gold that the reality of any slow and gradual rise from record lows after this week’s forecast increase could reinvigorate investment.
Although gold has managed to rise in the face of rising rates before, there is not enough support from other factors to push prices up this time around, analysts said.
“A lot of people are hopeful that the first rate rise will mark the beginning of a period where gold can start slowly to return to trading on more fundamental factors,” ICBC Standard Bank analyst Tom Kendall said.
“But it is hard to see what would really sustainably turn things around for gold in the short to medium term,” he added.
The metal had managed to shine in a rising rate environment before, most recently between 2004 and 2006, and also in the late 1970s.
But those were very different environments for gold. In the late 1970s, rate rises came in response to burgeoning inflation, itself a driver of higher gold prices. This year however, it is deflation that has made the headlines.
The 2004-2006 rate hiking cycle came as gold prices rallied in their own right, with newly launched gold-backed exchange-traded funds (ETFs) pulling in waves of investment, while mining companies closed out hedges, or forward sales, on a huge scale.
The gold market of today is a different beast.
Gold ETFs, which saw huge inflows during the post-2008 financial crisis, have recorded outflows for three years, while hedge funds’ net short positions in Comex gold futures reached record levels this month.
Demand for physical gold in China and India has been strong in recent weeks, but is highly price sensitive, while miners’ global hedge book has shrunk by 90 percent over the last decade, meaning further de-hedging is unlikely to offer support.
Much depends on how the U.S. economy responds to higher rates. If data shows growth is faltering, the Fed’s fledgling tightening cycle could go into reverse, supporting prices.
“The bull case for gold is moving that discussion away from, is there going to be a hike, to the question of how many hikes there are going to be,” Standard Chartered’s head of commodities research Paul Horsnall said. “If the answer to that is, as we think, two, that’s very positive for gold.”
However, if the economy looks to be weathering the hike in rates, more could be on the way. Without the support of dehedging, inflation pressures, or significant investor interest, gold could struggle.
“The big risk is that the Fed finds that non-zero rates aren’t so bad after all,” Macquarie analyst Matthew Turner said. “Then people will begin to price in a more aggressive tightening cycle.”
Reporting by Jan Harvey; Editing by Veronica Brown and David Evans