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19 March 2024

Golden dollar handcuff: Why not to buy precious metals

Published
By Vicky Kapur

The price of precious metals including gold, silver and platinum, and commodities such as crude oil continue to be hammered thanks to an oversupply in the market coupled with the dollar’s growing strength.

A whole host of commodities are languishing at multi-year lows, with 18ct gold price slumping to Dh100.25 per gram in Dubai while 24ct is being retailed at Dh129 per gram, according to the Dubai Gold & Jewellery Group.

Read: Latest gold, forex rates in UAE

“Commodities continue their week-long slump with growth dependent raw materials from energy and industrial metals taking the brunt of the selling. Oversupply in the oil market continues to be a concern, not least considering the uncertainty about when the adjustment process kicks off in earnest,” says Ole Hansen, Head of Commodity Strategy, Saxo Bank, in his latest weekly report on precious metals.

Other commodities such as silver, platinum, crude oil, copper and steel too are being traded near six-year lows.

While there are multiple factors responsible for such a situation – glut, sluggish demand, investor apathy to name a few – there is one culprit that stands out, and that’s the dollar strength. And it’s only going to get better (or worse, depending on which camp you’re in) from here, say analyst.

“The December outlook to a rate hike in the US and more quantitative easing in Europe should help the dollar make additional gains,” says Hansen.

“Much depends on investor attitude to the greenback in the aftermath of a near certain rate hike on December 16. The future speed of additional rate hikes will play a big part in the attractiveness of the dollar and to what extend this will create some additional headwind to precious metals,” he notes.

Gold and other precious metals, therefore, may continue to languish at least for another few weeks, he maintains. “With just under four weeks to go before the Federal Open Market Committee meeting we see limited upside to precious metals during this time. The market will be headline driven and barring any major geopolitical event, these headlines should mostly be gold negative considering the intense focus on the rate hike,” he believes.

According to Saxo Bank’s forecast, the short-term upside potential for gold seems limited to $1,110/oz while the 2010 low at $1,045/oz will provide the first major level of downside support.

Crude oil, however, is seeing signs of demand growth but not substantial enough for a fully fledged revival in the pricing pattern.

“While the oil market can take comfort from the fact that demand is rising the same cannot be said about industrial metals. This sector is suffering from the combination of oversupply and slowing demand, not least from China where the process of moving away from an investment and export driven economy towards a consumer driven economy has taken its toll on raw materials such as copper, steel and iron ore,” Hansen says.