Gold price recently sank to a fresh four-month low of $1,155 per troy ounce yesterday on the back of a strong US jobs data and India’s surprise decision to maintain the import duty on the yellow metal.
Data showed America added 295,000 jobs in February, 55,000 more than economists expected. US unemployment rate is now at 5.5 per cent, the lowest it has been since May 2008. This is fuelling investor confidence in the economy and, therefore, equities, and further reducing gold’s safe haven appeal.
The precious metal has shed about $145 per ounce since hitting a 2015 high of $1,300.70 on January 22, or down more than 11 per cent in less than seven weeks.
Also punishing the gold price is the persistent strength in the US dollar, which is currently hovering at a 12-year high against the euro. In fact, the beleaguered euro has shed more than 23 per cent of its value against the US dollar/UAE dirham in the past 10 months.
This combination of factors is seeing a weakness in other currencies too, including the Indian rupee, which is now trading near Rs17.10 per Dh1, a two-month low for the Indian currency.
Other major UAE expat currencies too have softened recently against the US dollar (and therefore the dollar-linked UAE dirham). The British pound is trading at Dh5.5 vs £1, close to a 57-month low of Dh5.46/£1.
The Pakistani rupee, on the other hand, is trading at PKR27.75 vs Dh1, a one-year low against the UAE currency. The Philippines peso is trading below PHP12 against Dh1, close to a six-month low.
According to Ole Sloth Hansen, Head of Commodity Strategy at Saxo Bank, the decline in precious metals, especially gold, is driven by the adverse impact of the dollar strength against the euro while China downgraded its growth target for 2015 to just 7 per cent, the lowest in more than decade.
“The resumption of dollar buying occurred as the market prepared for the beginning of quantitative easing from the European Central Bank,” he noted.
Hansen says precious metals as an investment category came under renewed selling pressure last week as the dollar resumed its ascent against most currencies. Against the euro, the dollar reached a new 12-year high yesterday as the prospect for QE in Europe and rising rates in the US left both metals on the defensive.
“The renewed focus on the adverse impact of dollar gains was found in the numbers with gold falling by more or less the same percentage that the dollar rose,” he said in his latest weekly report titled ‘Weakness strikes as gold feels the dollar heat’.
If this ratio holds, then expats in the UAE should look at diversifying their investments away from gold, and keep their savings in UAE dirham.
“Amid a rising dollar, the near-term risk to gold is that it will have to go lower with the next level of support being the January low at $1,168, followed by $1,150,” Hansen wrote in the report published on Sunday.
However, with gold quickly nearing that level, chances are that it will breach $1,150/oz soon, and analyst forecasts of $1,100/oz by June are appearing realistic.
Daniel Hynes, commodities analyst with ANZ bank believes gold could see a low of $1,100 within the next three months. “It’s come at a time when physical demand has been weak as well,” he said. “The headwinds for gold have been quite strong over the past few weeks and that payrolls number was the straw that broke the camel’s back,” he was quoted as saying by Smh.co.au.
“Our outlook for gold is fairly bearish at the moment. We’d be looking for prices to pressure the $1,100 level,” he said.
“All that safe-haven buying support we saw at the start of the year has completely evaporated and is unlikely to return in the short term,” he added.
Going by the earlier mentioned gold-dollar inverse relationship, the dollar (and the UAE dirham) should then appreciate by the same percentage (4.25 per cent). Which should mean that, if you hold back your dirhams until about June, you should (theoretically at least) be able to remit a few more rupees, pounds, pesos or whatever it is that you’re remitting.
Or – and do give this some thought since it will be almost time in June for the school summer vacations – why not take a family vacation to Europe? After all, the stay will be at least a quarter cheaper than last year because of the weaker euro and, with oil prices holding under $60 a barrel, the flights would cost less too.
Disclaimer: This article is for information and illustrative purposes only and should not be regarded as investment advice or as a recommendation regarding any particular asset class or course of action. Opinion expressed herein is current as of the date appearing in this article only and is subject to change without notice. In the event any of the assumptions used herein do not prove to be true, results are likely to vary substantially. Readers are advised to undertake their own due diligence and consult an advisor before making any investment decisions. Emirates 24|7 or its employees will not be liable for any losses – direct or indirect – that may arise from your reliance on the information provided above.