Rising geopolitical uncertainties, a dovish rate hike by the US Federal Reserve and an inflationary pressure will support gold's demand as a safe-haven asset, market strategists said.

The precious metal rose to its highest in nearly four weeks on Friday as political uncertainty led investors to favour bullion over assets considered riskier such as stocks.

At the G7 summit in Sicily on Friday, leaders of the world's rich nations face difficult talks with US President Donald Trump after he criticised Nato allies and condemned German trade policies a day earlier.

Spot gold gained 1.1 per cent at $1,268 (Dh4,668) an ounce in London on Friday, the highest since May 1. It closed the week up around one per cent, the third straight week it was higher. US gold futures settled up 0.9 per cent at $1,268.10.

"Geopolitical uncertainty is on the rise globally. Globalism is under threat at its very core with rising protectionism as a result. Gold as a hedge is a shock absorber against the next black swan," said Davis Hall, global head of forex and precious metals advisory for Indosuez Wealth Management.

Talking exclusively to Khaleej Times during his visit to Dubai, Hall said that given the situation this is a time for our customers in this region to diversify their portfolio. And gold is the best alternative.

He said that while the Nasdaq is at an all-time high, this is time when gold could be trading very, very cheaply.

"We currently suggest investors holding a balanced portfolio with 35 per cent equity exposure hold between a four and eight per cent protective allocation to gold in bullion form," he said.

Echoing the same sentiments, M.R. Raghu, managing director of Marmore, the research arm of the Kuwait Financial Centre (Markaz) and member of CFA Society Kuwait, said that investment in gold is a must for diversifying risks.

"[With the] rise of the Trump era, an unstable North Korea and strife in Iraq and Syria, gold prices may spike suddenly. However, gold should be viewed more as an insurance for the portfolio than an asset class since it is not an income-producing asset. Hence, ideally it should not be more than five to 10 per cent of one's portfolio," said Raghu.

 

Global demand

Global gold demand in the first quarter of 2017 was 1,034 tonnes, a decline of 18 per cent compared to the record it set in the first quarter of 2016, according to the World Gold Council's (WGC) latest Gold Demand Trends report.

Inflows into exchange traded funds totalled 109 tonnes that, although solid, were nonetheless a fraction of last year's near-record inflows. Slower central bank demand also contributed to the weakness. Bar and coin investment, however, was healthy at 290 tonnes, an increase of nine per cent year-on-year, while demand firmed slightly in both the jewellery and technology sectors.

Alistair Hewitt, head of market intelligence at the WGC, said: "Demand is down year-on-year, but that is largely because Q1 last year was exceptionally high."

"Retail investment demand is strong, up nine per cent year-on-year with demand worth over $11 billion in Q1. China led the way with bar and coin demand surging 30 per cent, breaching 100 tonnes for only the fourth time on record," Hewitt said.

 

Overvalued dollar

Hall said that after the US election expectations were high like stimulus, lower taxation, more jobs creation and faster economic growth.

"The anticipation of higher interest rate in the US created hype and pushed dollar price higher against major currencies. And now I think US dollar is extremely vulnerable, and one of my key take home is that we are at an inflection point on the euro against the US dollar," Hall said.

Gold and the dollar typically move in opposite directions, which means if the dollar goes down, gold futures will rise.

"Now the Fed is starting to reduce its balance sheet and I think ECB is going to slowly tell us that they are also going to stop increasing their balance sheet next year and what happen if all this incredibly stimulative and accommodative policies are taken away. The markets are going to be much more unpredictable than they are today. I think we need to take a step back, reduce the data start to put some shock absorber into portfolio there is nothing better than gold," he said.

"I tell my customers that don't buy gold to get rich, buy gold to remain wealthy," he said.

Hall said that Fed is going to raise rate one more time this year and that is less than the market thought five months ago.

"Inflation is coming back and inflation is good for gold. We are going to see gold reaching $1,300 per troy ounce soon. It could go higher for short-term," Hall said.

 

Indian demand

On the contrary, Raghu said that with more interest rate hikes expected this year, the mid-term price outlook for gold is bearish.

"However, jewellery demand in India and gold bar demand in China will offset any major fall in the gold prices," he said.

Indian jewellery demand jumped 16 per cent to 92.3 tonnes in the first quarter from last year's exceptionally low level of 79.8 tonnes as market conditions improved after a very tough 2016, according to the WGC.

It said the outlook for India's gold demand is robust.

"The combination of the wedding season... and continued remonetisation of India's economy should support gold jewellery demand," the WGC report said.

"Given the superior growth rates and rising net incomes in India and China, current and future generations will certainly maintain their well-established cultural attraction to the yellow metal. This ever-growing wealth effect is estimated to increase 150 per cent over the coming decades. A buy and hold savings approach on weakness will persist despite any weakness of their underlying currencies," Hall said.

Source: Khaleej Times