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Doubts over gold as hedging strategy

Glenn Freeman with AAP  |  30 Nov 2018Text size  Decrease  Increase  |  
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Going long on gold within your portfolio as a hedge against uncertainty in markets, economics and politics may not be the best strategy right now, experts say.

The precious metal is commonly used as something of a safety ramp for investors amid market volatility. While gold held steady overnight, some gains were retraced amid recovery in the US dollar and stronger signals of another rate hike from the US Federal Reserve – possibly as early as December.

Spot gold rose 0.2 per cent to $US1223.75 per ounce, having earlier hit its highest since 22 November at $US1228.96.

US gold futures settled up barely changed at $US1224.10.

A majority of Fed officials at their last meeting in early November agreed another interest rate increase was "likely to be warranted fairly soon," according to minutes from the meeting. The minutes also opened debate on when to pause further hikes, and how to relay those plans to the public.

The Fed has raised rates three times this year. After the meeting on 8 November, it announced it would maintain the target range for its benchmark interest rate of 2 to 2.25 per cent.

Federal Reserve Jerome Powell interest rates US

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Many investors expect the Fed may tone down its aggressive monetary policy

Elevated interest rates increase the "opportunity cost" of holding gold, according to George Gero of RBC Wealth Management.

Gold prices jumped on Wednesday after Powell said the central bank's policy rate is "just below" estimates of a level that neither brakes nor boosts a healthy US economy.

Many investors read the remarks as an indication that the Fed could tone down its aggressive monetary policy.

"Geopolitical risk between Russia and Ukraine is going to cause investors to move into the gold market as well. We could see another conflict arise, a much more aggressive one than what we saw previously with Crimea," said Phil Streible, senior commodities strategist at RJO Futures in Chicago.

Days after Russia seized Ukrainian vessels and their crews near Crimea, the Ukrainian region which Moscow annexed in 2014, German Chancellor Angela Merkel said the West was imposing sanctions on Russia to stand up for international law.

Oil rout reverses

There were brighter fortunes within the oil markets, as prices climbed 3 per cent overnight on the back of Russian agreement to a production cut. Next week's OPEC meeting also played a role in the price uptick.

Brent crude futures rose $US1.22, or 2 per cent, to $US59.98 a barrel.

US Texas WTI futures were up 2.6 per cent to $US51.59 a barrel

Russian President Vladimir Putin – leader of the world's second biggest oil producer – has indicated he is ready to continue cooperation on supply if needed, but was satisfied with an oil price of $US60.

Uncertainty around this weekend's G20 meeting has saw the price retract slightly from session highs, as investors await the outcome of both the official business of the summit and the all-important sideline trade discussions – particularly between US President Trump and China President Xi Jinping.

Some analysts, including CMC Markets strategist Michael McCarthy, suggest anticipation of the meeting may boost oil prices still further.

Copper prices also gained, even as trade tensions and the same uncertainties alluded to above – the G20 and prospect of a December Fed rate rise – as trade slowed considerably.

Contractual uncertainties in the Indonesian copper smelting unit of Japan's Mitsubishi Materials also supported copper prices, as it declared "force majeure".

The premium of cash copper over the three-month contract has risen to $US42.50 a tonne from $US14 two weeks ago, while the premium of cash zinc over three-month zinc has gained to $US93 a tonne from $US56.50 since November 13.

Most metals closed higher on Wednesday after the chairman of the US Federal Reserve suggested the central bank could be nearing an end to its three-year rate tightening cycle, giving a boost to global share markets.

Alongside trade tensions, a slowdown in consumption of metals by China, the biggest consumer, weighed more heavily on trade levels.

Zinc prices also gained on low inventories, alongside a moderate 0.4 per cent price increase in aluminium to US$1940 a tonne and Nickel, up 2.4 per cent to $US11,055 a tonne.

. Glenn Freeman is senior editor, Morningstar Australia.

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