SINGAPORE (June 6): Have gold investors sold in May and gone away? The yellow metal had climbed 22% since the beginning of the year to a recent high of US$1,295 an ounce on May 2. Since then, however, it has fallen 6% to US$1,215 an ounce.

What’s going on with gold? Ole Hansen, head of commodity strategy at Saxo Bank, provides some golden nuggets of information.

1) The Fed rate effect

Hansen attributes the selloff to the recent strength in the US dollar, driven by the hawkish tone of several officials of the US Federal Reserve’s rate setting committee in the past weeks.

The US Dollar Index, which measures the value of the US dollar against a basket of major currencies, is up 3.5% for May.

“The Fed is increasingly concerned about how dovish the market has been in interpreting their signals from their recent meetings. They are putting a halt to that by coming out a little more hawkish in terms of where they see interest rates develop. That’s really triggered the major correction in gold since the rally began,” Hansen tells The Edge Singapore.

2) End of gold rally?

So, with a June rate hike looking likely, the US dollar is likely to continue strengthening. Does this spell a death spiral for gold from now on?

Not so fast.

Hansen says demand for gold could prove to be strong enough to support prices at about current levels. Interestingly, as at end- May, holdings of physical gold by exchange traded funds were up about 11 tonnes versus the beginning of the year. More recently, while gold prices dropped 5.5% during May’s selloff, total holdings of gold by ETFs actually went up 5%, Hansen points out.

3) So, where are gold prices headed?

Hansen believes gold will chart a steady uptrend from here. Of course, there is bound to be some volatility, he says, and he would not be surprised if gold were to retrace to as low as US$1,175 an ounce. However, if it fell significantly below that level, he might re consider his conviction.

“If it returns to US$1,145, that would have removed enough strength in the market to start raising worries whether this was just another blip like [the one] we saw this past couple of years, where we had strong moves in the first quarter of the year,” he says.

To find out more about the gold rout, get this week’s edition of The Edge Singapore Issue 731. Pick up your copy at selected 7-11 outlets and petrol stations now!