Gold Prices: Weaker US Dollar Will Help Fight Higher Bond Yields – Commonwealth Bank

New York (Apr 5)  Easing tensions around a potential trade war between the U.S. and China is taking some momentum away from gold, but one Australian Bank remains optimistic on the yellow metal as geopolitical issues won’t be going away anytime soon.

In a recent report, Vivek Dhar, Mining and Energy Commodities Analyst at the Commonwealth Bank, revised his gold outlook for this year and next. He said that he now sees gold prices averaging 2018 around $1,336 an ounce, rising to an average of $1,361 an ounce in 2019, up 4.2% and 8.5% respectively from the bank’s previous estimates.

Dhar said that he sees gold prices pushing higher because of a weaker U.S. dollar and growing geopolitical risks.

“We upgrade our gold price forecast to reflect our weaker US dollar outlook,” he said. “The US dollar, which is negatively correlated to gold prices, has only recently become the primary driver of the precious metal.”

Dhar continued to emphasize that gold investors need to keep an eye on the U.S. dollar as that is the primary driver in the marketplace, not bond yields. Historically, gold has had a high negative correlation to bond yields. Higher bond yields increase gold’s opportunity costs as a non-yielding asset.

However, that correlation has broken down as gold prices remain elevated despite U.S. 10-year bond yields holding near a two-year high. Dhar said that a weaker U.S. dollar is the reason why gold has been able to combat higher bond yields.

“Typically, rolling correlations do move around over time, but the last time the correlation between US 10 year real yields and gold prices diverged this much was 2012,” he said. “Surprisingly, the US dollar has emerged as the more reliable relationship with gold prices over the last six months.”

The U.S. Dollar Index last traded at 90.41 points, up 0.30% on the day. At the same time, June gold futures last traded at $1,327.50 an ounce, down 0.95% on the day. 10-year bond yields are at 2.82%.

Looking ahead, Dhar said that the U.S. dollar should continue to dominate the gold market until mid-2019.

However, Dhar is not entirely ignoring bond yields as this market still poses the most significant risk for gold prices. Currently, Commonwealth bank expects to see two more rate hikes this year and two rate hikes next year, which would cause interest rates to plateau in a range between 2.50% and 2.75%. However, the Federal Reserve is forecasting rising interest rates in 2019 and 2020.

Dhar explained that the Federal Reserve’s forecasts imply more downward pressure on gold.

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