21 October 2016
Gold price may hit US$1,300 once it breaks its resistance level. Photo: Reuters
Gold price may hit US$1,300 once it breaks its resistance level. Photo: Reuters

Suspended rate hike good for commodity prices

The United States has released several disappointing economic data, which, together with dovish comments by Federal Reserve officials, led to a notable weakening of the US dollar in recent days.

Commodity prices are gaining strength. But the global oversupply is hard to turn around amid weak demand, which means that prices of cyclical commodities will have limited room to increase.

The Fed missed the chance to raise interest rates in September, and the market is now expecting a rate hike in December or even early next year.

When rate hike is nowhere in sight, the greenback is expected to weaken. How will such a situation support commodities prices?

Although the dollar is starting to weaken, a significant drop is not likely to happen.

First to all, economic data from Japan and Europe is even worse. And as the consumer price index declines, loose monetary policies are expected to last for a longer period.

So both the yen and the euro are facing strong downward pressure.

Given such a situation, the expectation for an eventual hike in US interest rates will prevent a big depreciation of the dollar. Commodity investors should not expect too much from the weakening of the dollar.

In addition, the rise in gold price is a reasonable result. According to CFTC data, the number of speculative positions on gold futures soared to 120,000 last week from about 40,000 in mid-September.

Changes in holdings of related exchange traded funds (ETF) are not so big, but a rising trend has appeared.

However, the gold price was lingering around US$1,170 to US$1,230 in the second quarter, creating a resistance for it to increase (especially when the dollar is stable and the possibility of an emerging market crash has decreased substantially). But once the gold price breaks the resistance level, it may hit US$1,300.

There are growing concerns over further slowdown in emerging economies. But since China’s latest economic growth figures are better than market expectations, indicating less risk for a hard landing and offering relief to investors of cyclical commodities.

When demand improves, the market will again focus on supply. Production cuts by major producers such as Glencore-S (00805.HK) will improve the supply-demand balance. Similarly, oil production cuts in the United States will help boost market sentiment.

This article appeared in the Hong Kong Economic Journal on Oct. 20.

Translation by Myssie You

[Chinese version中文版]

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Vice president, ADMIS Hong Kong Limited

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