Monday brought news that U.S. manufacturing output collapsed to its lowest level since the financial crisis. Given this underlying weakness in the economy, if the Federal Reserve is actually serious about raising interest rates in June or July, it risks committing a policy error that sets a fresh fire underneath gold prices.
Any Fed rate tightening is widely expected to be bearish for stock prices. That reaction is going to be negative, said Krishna Memani, chief investment officer of OppenheimerFunds. The Fed cant kid itself on that.
The key factor that drives gold is the threat to equities, so if you sort of think through that the Fed rate hike may actually trigger a selloff in equities, that will probably be very positive for gold, and as long as gold holds the $1,200 level, I still think its a pretty good long, argued BK Asset Managements Boris Schlossberg in a recent CNBC appearance.
And one Deutsche Bank team thinks that if the Fed hikes prematurely, we will re-enter the doom loop from a more hawkish Fed to a stronger dollar, lower oil prices, higher [high-yield] credit spreads and lower equity markets. The end result is that the central bank might have to reverse those hawkish measures by cutting rates again.
Greater volatility requires gold: Citing the effects of Fed moves, a major wealth management firm in the United Arab Emirates is going so far as to predict gold will hit $1,400 this year and $1,800 by the end of 2017, Bloomberg is reporting.
We believe that policy mistakes by central bankers, in this case the Federal Reserve, will lead to greater volatility in the global economy, maybe another slide in those growth rates into the future, creating more problems for the financial system, said Gary Dugan, chief investment officer atEmirates NBD PJSC. And so we believe that typically, a client should have 5% to 10% of their portfolio in gold, and should be buying after the recent dips of the last week.
Islamic gold standard could be huge: And that advice could be huge as the Islamic world moves toward developing a gold standard based on Shariah law, which forbids interest payments and investing in industries such as gambling and alcohol. A Bahrain-headquartered group called the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) is working with the World Gold Council and Amanie Advisors to craft that standard.
A gold standard based on Shariah law would require investment options directly linked to physical bullion not substitutes like Comex gold futures.
So far, Islamic investors have been reluctant to invest in gold because to do so, they would need the metal in physical form as an underlying asset, which is rarely the case in conventional gold trade, Qatars Gulf Times news site reported.
We are almost there in finalizing a gold-standard plan for the AAOIFI, said Shariah expert Mohd Daud Bakar.
Overwhelming demand noted: The upshot is that hundreds of tons of new gold demand could be created, said the WGCs Natalie Dempster. The standard would fill an important gap in the market.
She told the Gulf Times: We found that there is overwhelming demand for gold to play a greater role in Islamic finance. Our discussions with industry participants signal that it will act as a major catalyst for the development of a broad range of Shariah-compliant gold products such as gold accumulation plans and physically-backed gold funds.
Thus, as central banks such as the Fed continue to lose the confidence of investors worldwide, gold should stand to gain, and the Islamic world is positioning itself to become an even greater source of heavy demand for the yellow metal.