By Myra P. Saefong, MarketWatch
For many gold traders, the only story worth following is the one about the Federal Reserve and when it will increase the benchmark interest rate.
Not so for Frank Holmes , a longtime mining fund manager who is chief executive of U.S. Global Investors and co-wrote the 2008 book “The Goldwatcher: Demystifying Gold Investing.” He currently co-manages the U.S. Global Investors Gold and Precious Metals Fund /zigman2/quotes/209102307/realtime USERX -7.19% .
In an interview with MarketWatch, Holmes said four factors — shrinking real interest rates in the U.S., a dip in the dollar that led to a so-called “death cross” formation, a jump in the global purchasing managers index and signs of increased demand from China — suggest that gold could finish the year higher, perhaps as high as $1,350 an ounce, which would be about 25% above Thursday’s close.
U.S. Global Investors
Today, that might be hard to fathom, as many investors are down on the precious metal, which is in its third straight down year and hasn’t closed above $1,300 since 2014. Futures prices for gold have lost more than 5% this month and on Thursday settled at $1,081 an ounce for the worst finish in more than 5 years.
Gold prices have fallen about 8% from the settlement of $1,176.10 on Oct. 28, the day the U.S. Federal Reserve said it would decide whether it’s appropriate to raise the target range at its next meeting in December. The market’s estimation of the odds of a hike in December , as calculated by the CME Group FedWatch tool, jumped in response.
Higher rates — they have been near zero for years — can be a headwind for gold, which doesn’t bear interest. They can also lead to a stronger dollar /zigman2/quotes/210598269/delayed DXY -0.25% , which often weighs on dollar-denominated commodities, such as gold.
Holmes, however, says he isn’t particularly preoccupied with the Fed and its plan for nominal interest rates when it comes to looking beyond short-term moves in gold. Other factors that could already influence gold’s outlook, he says, are already in play.
A gold ‘breakout’
Bloomberg, U.S. Global Investors
That coincided with a weakening of the U.S. dollar that signaled a “death cross” — a technical term generally indicating a bearish trend that occurs when an investment’s 50-day moving average falls below its 200-day moving average, which is what happened to the U.S. ICE Dollar Index /zigman2/quotes/210598269/delayed DXY -0.25% .
Commodities priced in dollars, including gold, often trade inversely with the dollar, as moves in the U.S. unit can influence the attractiveness of those commodities to holders of other currencies.
As such, a death cross for the dollar is often seen as good news for gold. There is an “80% chance gold will turn up” in such cases, Holmes said.
Bloomberg, U.S. Global Investors
An eye on shrinking real interest rates
Gold hit all-time highs of $1,900 per ounce in August 2011, when real interest rates — what you get when you deduct the monthly rate of inflation from the 10-year Treasury yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +3.62% — were at negative 3%, notes Holmes. That, he said, made gold especially compelling, because investors who bought the 10-year at that time essentially lost 3% a year on a “safe” Treasury investment.
“Since gold doesn’t cost anything to hold, it became more attractive and the metal’s price soared,” said Holmes.