The relationship between gold and investors is like one between a mother and her prodigal son. A dovish Fed and economic uncertainty have seen the investors cling tightly onto “mother bullion’s” apron strings. But amid talk of a Fed tapering, Bank of Singapore (BOS) currency strategist Sim Moh Siong sees investors lured away from gold by more seductive yields elsewhere.
“US real yields could move higher towards year end amid a more positive macro backdrop, which should weigh on gold. History shows that over time, the price of gold closely tracks real US bond yields,” writes Sim in a June 4 broker’s report. He targets gold prices coming in at US$1800/oz ($2383.36) in a year’s time.
Even if a taper tantrum is avoided, Sim sees markets failing to resist the sweet nothings of Fed taper talk. There is a growing risk of a tone shift from voting members of the Fed’s Open Market Committee (FOMC), as more Fed governors clamour to start discussing the timetable for policy exit. The Fed, Sim warns, could start discussing tapering soon.
Not that it was all doom and gloom however. Bitcoin’s recent dip has called into question its claim to be a store of value, with investors seemingly reluctant to buy the crypto dip. While gold and Bitcoin are both seen as stores of value, Sim observes that the role of Bitcoin is highly contested while gold’s role in an investment portfolio is better understood.
“The sharp rise in Bitcoin's volatility could reduce the attractiveness of digital gold versus traditional gold in institutional portfolios. Gold may yet again overshoot and linger slightly above US$1900/oz in the near term, especially if the May US non-farm payroll comes in lacklustre relative to increased expectations in recent days,” he remarks.
But while gold will continue to feature in investor portfolios, Sim expects smaller allocations given that tactical gold positions that had been “put on over” the past few months could unwind. He indicated a preference for industrial commodities like oil and copper to gold - at least the former offer a positive carry compared to gold, which offers no yield.
With silver taking direction from gold, these downside risks from gold could affect the price of silver in the medium-term. This is in spite of rising industrial demand as growth picks up.
“Auto, solar power, chemicals and the key electrical and electronic sectors should grow in line with the economic recovery and boost silver demand,” Sim remarks, noting that silver is primarily a precious metal as opposed to an industrial metal and thus resembles the former more closely.
As of 2.33pm on June 7, 2021, gold is trading at US$1,887 (Comex) while silver is trading at US$27.68.
