Rising short-term interest rates and the unwinding of securities held by the US Federal Reserve may not necessarily weigh on gold prices, analyst Bart Melek of TD Securities said Sunday.
Gold may instead attract investor support from low interest rates adjusted for inflation and a flat bond yields, Melek said in a presentation at the International Precious Metals Institute conference.
"We think the biggest driver of gold and precious metals is not inflation broadly; it's really the combination of monetary policy and inflation rather than inflation alone," he said.
Since real interest rates are likely to remain relatively low globally due to the loose monetary policies being pursued by central banks to support economic activity, the financing costs of holding gold and precious metals will also remain low, Melek said.
"That has been a fairly good predictor of gold prices," he said.
Gold may however, dip ahead of the Fed's June 13-14 meeting, when it is widely expected to raise short-term interest rates by 25 basis points, he said.
The Fed is also likely to say the additional interest rate increases are likely in the near term. "They will continue to signal that they are ready" to raise interest rates. "Whether or not they do it is another thing," Melek said.
Pointing to moderate US job growth, relatively low worker participation levels, and stagnant inflation, Melek said he believes the Fed remains uncertain about the economy and will likely be "very measured" in its approach to monetary policy.
"There's not a lot of incentive for the Fed to get aggressive," he said. "I think they may want to normalize, and we think they're going to move in June and perhaps once more later in the year, and perhaps once more in 2018."
If the Fed is less aggressive about raising interest rates, the recent strength in the US dollar could end, he said. The dollar tends to have an inverse relationship to gold.
Moreover, global political instability, a possible US government intervention to weaken the dollar following the passage of a border adjustment tax, and growing US budget deficits caused by inadequate tax reform may also help gold, Melek said.
A weaker US dollar, growing US budget deficits and low real interest rates could prompt central banks around the world to buy gold to diversify their foreign currency reserves, he added.
