MANY investors see gold as a hedge or store of value against inflation. Yet, prices of the precious metal have been volatile lately despite the rise in global inflation expectations.

       There are different forces are at play, driving the volatility, analysts note.

       On one hand, being a “safe haven”, gold appears unattractive in a positive economic environment, as investors seek higher exposure to risk-on assets such as equities for better returns. Hence, with the global economy currently rebounding from the fallout of Covid-19, gold has not exactly been a favoured asset class.

       On the other hand, negative real interest rates amid higher inflation have helped gold prices recover initial losses in the year and could continue to support this trend.

       ALA Advisors chief investment officer Dar Wong tells StarBizweek he expects gold prices to recover in the second half of 2021 and revisit the US$2,000 (RM8,400) per ounce level.

       The Singapore-based veteran trader expects strong buying interest to emerge if the commodity prices fall to around US$1,720-US$1,750 (RM7,052- RM7,175) an ounce.

       “Generally, traders are still focusing on United States stock markets in the July-August season for earnings reports. After the buying sentiment (for equities) simmers down, traders will return to precious metals as their next rotation,” Wong says.

       “Moreover, we foresee the US Dollar Index will likely weaken below the 90-point benchmark in August due to the next stimulus rollout. This will lift gold prices into a new buying cycle,” he adds.

       Gold prices – spot and futures - are currently hovering around the US$1,800 (RM7,380)-an-ounce level.

       The commodity rose to its highest-ever near US$2,075 (RM8,507) an ounce in 2020 amid the spread of Covid-19 and central banks worldwide easing their monetary policies to support the economy.

       Moving into 2022, Wong says, market liquidity could tighten from rising bond yields.

       “This might inject a roller-coaster trend into gold prices, with the commodity expected to reach new highs and then see a quick correction thereafter,” he says.

       “Despite the volatile cycle, we project gold prices will ascend gradually in a wave-like pattern,” he adds.

       Limited gains

       Similarly, while Phillip Futures Sdn Bhd dealer Tan Jenn Yuan remains positive on gold, he expects upside for the precious metal to be limited due to a potential rate hike by the US Federal Reserve (Fed) in response to rising inflation and economic recovery from the Covid-19 crisis.

       “Metals tend to be more sensitive to interest rates than inflation data,” he said.

       He notes that non-yielding gold tends to gain in a low interest-rate environment, hence, anticipation of monetary policy tightening by the Fed could weigh on gold prices.

       Nevertheless, Tan expects gold prices to trend upwards for the remainder of 2021.

       He, however, does not expect the commodity to rise above US$2,000 (RM8,200) per ounce, noting gains will be capped by rising bond yields and the buoyant performance of risky assets such as equities.

       According to Tan, downside to gold will also be limited, as increase in investment demand and a gradual recovery in consumer demand in China and India will support prices.

       He notes the potential weakening of the US dollar will also be supportive of gold prices.

       Also optimistic on gold, US Global Investors head trader Michael Matousek expects the metal to head towards US$1,900 (RM7,790) in the coming months.

       “We’re still seeing a lot of inflation and it does not seem to be as transitory as everyone thinks,” Matousek told Reuters over the week.

       Given the inflation and lower real interest rates, gold could attract more bids and move towards US$1,900 (RM7,790) in the coming months, he added.

       Bearish view

       Meanwhile, OCBC Bank has a bearish outlook on gold through this year and 2022.

       It is of the opinion that the precious metal gold has peaked at US$1,900 an ounce.

       The bank expects the price to trend lower to US$1,800 (RM7,380) an ounce by the end of 2021, compared with the average of US$1,850 (RM7,585) an ounce in the second and third quarter of the year.

       This projection is based on expectations that the global vaccination drive will gather pace, while the US Federal Reserve turns increasingly less dovish on its monetary stance, driving real rates higher and in turn pushing gold prices down.

       OCBC expects gold to reach its terminal steady state price of US$1,500 (RM6,150) by end-2022.

       HSBC Banking group has recently downgraded its view on gold after maintaining a positive stance for almost a year.

       “We believe its diversification benefits in a multi-asset portfolio have decreased somewhat lately and prefer to get some yield in the bond market instead,” the group explains in its investment outlook report for the third quarter of 2021.

       HSBC notes that over the past few months, gold has weathered some competition from cryptocurrencies, particularly bitcoin, as investors’ choice for diversification and as a store of value. But given the high volatility of cryptocurrencies, some investor flows appear to have moved back into gold, which is a more well established and liquid asset with some pedigree.

       “We therefore are not convinced that cryptocurrencies can replace gold’s status as a global store of value just quite yet,” it argues.

       Increased allocation

       The World Gold Council (WGC) reckons that investors of late have been adding more risk to their portfolios in search for returns and this in turn has required them to revisit their risk management strategies.

       “Our analysis suggests that this could increase the need to hold assets such as gold for downside protection and diversification,” it notes.

       “This applies not only to private individual and institutional investors; central banks have steadily increased their allocation to gold so far in 2021 and our research suggests they will continue to do so. And we believe that, collectively, they may deliver net purchases at the same rate or potentially higher than in 2020,” it adds.

       In the short to medium term, interest rates will remain a key driver for gold, WGC says.

       It says the negative impact of higher rates on gold will likely be offset by the longer-lasting effects and unintended consequences of expansionary monetary and fiscal policies created to support the global economy. These may include inflation, currency debasement, and higher exposure to risk-on assets in portfolios.

       Combined with attractive entry levels, following a price pullback in late June, these factors could prompt strategic investors to add gold to their allocation strategies and support central bank demand during the second half of the year.