# Gold – Bullish combination could prevail

## A round up this quarter

In the first three months of 2016 gold rallied 16 percent after falling about 10 percent in 2015. A component in the rise included higher risk aversion, downward revisions to the Fed’s tightening cycle and brighter sentiment across commodities. However we foresee gold strengthening further and ranging between $1,180 and$1,325 in the second quarter as we expect downward pressure to re-emerge later in 2016 stemming from a stronger dollar and rising US real interest rates.

We saw gold enjoy a dramatic rally in the first quarter of the year, rising 16 percent to a high of $1,283 per ounce on March 11 before consolidating – it closed at$1,232 on March 31. The elements that drove its impressive performance in the early months of 2016 consist of growing uncertainty over global growth, lower Fed interest rate expectations and an improvement in commodities. Even though we assume these elements will remain at play in the second quarter, providing gold with further upward pressure, we expect them to reverse in the second half of the year, which should result in fresh fragility.

### Impressive Q1 rally

Gold’s steep climb at the start of the year was triggered by fears over a hard landing in China, which resulted in a rapid sell-off in Chinese equities spreading to other parts of the world. This resulted in sending investors towards safe-haven assets, boosting ETF holdings. Buying pressure in gold was reinforced by downward revisions to the expected path of US interest rates from investors and the Fed. Fed tightening expectations through the first quarter pushed gold higher by pressuring the dollar four percent lower and by moving real yields on the 10-year US Treasuries to their lowest since April 2015.

### Demand set to remain strong in Q2

We predict investment and speculative demand could remain strong in the second quarter as the macroeconomic environment is showing increasing vulnerability due to the growing political uncertainty in the US and Europe

#### However gold could reveal negative surprises later this year

Despite a challenging and uncertain global environment, we expect the US economy to remain resilient in 2016. We suspect the Fed will continue to tighten by raising rates twice this year – in line with the latest FOMC projections. We believe investors are underestimating the future path of US policy since the market currently expects only one increase in 2016, as the 30-day Fed-fund futures show. So we think that a re-pricing of tightening expectations is likely in the second half, which should exert upward pressure on the dollar and US real interest rates. This could result in investment demand weakening via outflows from ETF holdings while speculative buying on Comex could turn into strong selling should money managers start to unwind their long positions. This would echo our view that gold prices could move lower toward \$1,000 in the second half of 2016.

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