Gold Favored as Fed May Have to Backtrack, Mideast Bank Says

Gold may rally to $1,400 an ounce in the near term and go on hit $1,800 by the end of next year as the world’s central bankers err, according to the largest lender in the United Arab Emirates, which is advising clients to hold up to 10 percent of portfolios in bullion and buy recent dips.

A premature hike by the Federal Reserve may lead to a slide in inflation, a pullback in growth and greater volatility, causing investors to shun risky assets, according to Gary Dugan, chief investment officer for wealth management at Emirates NBD PJSC. Should the Fed stumble by tightening, investors’ faith in the dollar will be eroded, buoying bullion, said Dugan, who spoke in an interview on Bloomberg Television in Singapore and to a reporter.

Gold has rallied 18 percent this year on haven demand as investors doubted the Fed’s resolve to act in 2016 amid lackluster growth. At the same time, central bankers in Europe and Japan have adopted or deepened negative rates, spurring a debate among investors about the limits of monetary-policy effectiveness. Over the past three weeks bullion has weakened as the chances of a U.S. rise were reassessed, and Dugan said a move to higher rates at present could be a mistake as inflation expectations aren’t entrenched, and a rise could soon be followed by a cut.

‘Loss of Hope’

“If we give up on the central bankers, there’ll be a kind of loss of hope,” said Dugan. Should U.S. policy makers go for a hike, “people will be saying ‘Well if you’re maybe increasing interest rates then cutting them back again, which is what’s happening in every other part of the world, then you’ll be on gold’.”

Spot gold traded at $1,250.58 on Monday after dropping for the past three weeks from $1,303.82 on May 2, the highest level since January 2015. It’s still the best performing major metal this year after silver on the Bloomberg Commodity Index, with holdings in exchange-traded funds jumping 26 percent. The holdings have expanded over the past three weeks as prices dropped.

Bloomberg
Gary Dugan
May 23, 2016