Gold, potential support from geopolitical tensions

After hitting a seven week high early in the month but failing to breach the USD 1300 psychological level, gold pared back most of its gains as the USD started to firm in the aftermath of the lifting of a few uncertainties.

The ECB meeting came and went and, as expected, the Central Bank kept its monetary policy unchanged. Draghi also declared that the risks to the growth outlook are now broadly balanced and adjusted its forward guidance slightly.

The Conservatives remained the largest party but lost their majority at the UK General Election; the outcome could now help to prompt “soft” Brexit negotiations (rather than a “hard” stance).

Former FBI Director Comey’s testimony in front of the Senate turned out to be less damaging than expected for President Trump. And finally, in the French parliamentary elections, President Macron’s party is heading for a strong majority.

Gold continued to correct yesterday on the back of the higher USD; as expected, the FOMC increased interest rates by 25 bps for the second time this year and Chairwoman Yellen delivered a rather positive assessment of the US economy while indicating that the recent disappointing macro data (US job data, Durable goods, etc.) appears to be only temporary. She guided in favor of further gradual rate hikes, with the decisions being data dependent. The market is currently pricing a 30% probability of another rate hike by the end of the year.
Yellen also declared that the Committee will start “implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated”.

Within this background, gold should not be entirely dismissed. Continuing uncertainties surrounding the Trump administration’s ability to deliver on its promised pro-growth policies and the recent increase in geopolitical tensions in the Gulf region (Qatar) coupled with repeated North Korean missile launches could continue to remain supportive for the yellow metal as a safe haven.

Névine Pollini – Senior Commodity Analyst – Union Bancaire Privée (UBP)