The gold price gained more than 3 percent in the third quarter of the year on the back of geopolitical developments and a softer US dollar.
However, worries about the US Federal Reserve increasing interest rates again later this year and a rebound in the dollar are now putting pressure on the yellow metal. On Monday (October 2), gold was trading near a seven-week low of around $1,279 per ounce.
To gain more insight on the gold market, the Investing News Network caught up with Brien Lundin, president and CEO of Jefferson Financial. Read on to find out what he thinks is ahead for gold.
What factors will move the gold price?
Geopolitical developments led the news in the third quarter of the year, with tensions between the US and North Korea escalating rapidly. As a result, investors turned to gold as a safe-haven asset, pushing prices above the $1,300 mark for the first time in more than a year.
“I don’t think the North Korea story is going to go away anytime soon. I think that is a very real and dangerous issue that will be resolved at some point this year,” said Lundin, who is also editor of the Gold Newsletter.
“Any resolution that doesn’t involve China is terrible to contemplate, and will have tremendous implications not only for the markets, but for the welfare of many thousands of individuals,” he added.
That said, Lundin sees geopolitical tensions as a short-term driver of prices, and prefers to focus on economic and monetary issues as long-term drivers for metals.
“I don’t like geopolitical developments as a driver for gold because they tend to appear and disappear very quickly, causing short-term spikes that don’t last in the long term,” he explained.
He noted that the Fed’s hawkish tone also impacted gold in Q3, and investors are now expecting policymakers to increase rates at least one more time this year. Higher interest rates can be bad for gold, as they curb the investment appeal of non-interest bearing assets like precious metals.
According to Lundin, it’s important to be cognizant of interest rate increases, but not necessarily concerned. He pointed out that gold declined in the lead up to rate hikes that took place in December 2015 and December 2016, but then rose in the new year.
While he isn’t sure if gold will decline again this year as December approaches, he commented, “gold has used [these price declines] as a sprint for a considerable rally going into the new year, which I think we may see again this year.”
Other central banks aside from the Fed have signaled that they will tighten monetary policy in the next few months, and Lundin said investors should keep an eye on them as well. One is the European Central bank, which has has already made announcements about its quantitative easing program.
For Lundin, the future of the US dollar, which is determined by the attitude of the markets to Fed policy, is a final key issue to watch going forward. “Gold investors really need to watch monetary policy and the flow of economic data in the US,” he said.
A softer dollar could be good news for gold demand, as a weaker greenback makes commodities priced in dollars cheaper for investors using other currencies. “I think that is a long-term trend that will continue as there are doubts about the Fed’s commitment and ability to maintain its campaign of interest rate normalization,” he added.
If there are any signs of a weakening dollar, that would be “extremely bullish for gold,” as it would mean the Fed will not be able to increase rates as fast as planned and will need to reverse its course.
Where is the gold price heading?
As mentioned, the gold price broke $1,300 in August, and held near that level for several weeks. Many analysts said at the time that they expected the yellow metal to reach $1,400 by the end of the year.
“I think it would be hard for gold to break the $1,400 per ounce mark at this point, as the metal has given up much of its rally since July,” Lundin said. Instead, he expects gold to end the year between $1,300 and $1,325, a base that could be used as a launching pad for more gains in 2018.
Other analysts are more bearish, such as Nitesh Shah, commodities strategist at ETF Securities, who recently told the Investing News Network that he sees gold trading at $1,260 in the last quarter of the year. Click here to read the full interview.
Similarly, FocusEconomics panelists estimate that the average gold price for Q4 2017 will be $1,250. The most bullish forecast for the quarter comes from Macquarie, which is calling for a price of $1,325; meanwhile, Emirates NBD is the most bearish with a forecast of $1,180.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.