Despite rebound sign, gold loses shine

Although gold prices, which have been slumping of late, have showed signs of a rebound on softening US dollar, the upside may not last long due to a variety of factors, analysts said.

For one, the recent continuous price slump has shaken the market confidence and spread concern among traders.

For another, throughout June, prices dropped despite trade tensions, falling US bond yields and investors' growing risk-aversion. In the normal course, the three factors would have sent investors scurrying toward gold from other asset classes. But not this time.

In fact, the tumble on June 25 offset the price gains made by the precious metal this year. The slump extended to the first trading day of July.

Gold dropped below $1,240 per ounce, hitting a record low since Dec 13 last year. According to French commercial bank Societe Generale, the price of spot gold has contracted by over 8 percent ever since it hit the year's high of $1,365.23 in April.

The stronger US dollar is the main cause for the gold price decline, SG said.

As of Wednesday, gold prices have shown signs of a rebound toward $1,255, thanks to a softening US dollar, according to FXTM, a forex broker.

But Lukman Otunuga, a research analyst at FXTM, wrote in a note that the upside is unlikely to last long, although gold has the scope to extend gains in the near term if the US dollar continues to weaken.

Technically, gold remains bearish on the daily charts as there have been lows consistently while the recent highs tended to be smaller compared to the past.

"The current rebound continues to highlight how gold remains extremely sensitive to the negative correlation against the US dollar," Otunuga wrote. "With market expecting the Federal Reserve to raise interest rates at least two more times this year, zero-yielding gold could witness further downside."

Otunuga further said investors may exploit the current technical rebound on gold to drive prices lower as the fundamental drivers behind the US dollar's appreciation are intact.

Traditionally, the market defines gold as an effective anti-inflation tool. When inflation rate increases, investors would favor gold－they buy it in bulk.

Since the beginning of this year, inflation rate rose, gaining more than 2 percent to 2.8 percent by May, the baseline set by the Federal Reserve.

Hence, the steady decline since then has unsettled the market. But Zhao Wei, senior analyst at Changjiang Securities, said gold prices are influenced by the effective interest rate in the US in the long term and affected by the US dollar in the short- to mid-term.

"Based on previous experience, gold was less attractive when the yield rate of the US dollar declined. So, the gold price would go down further," he said.

As gold is priced in US dollars largely, the currency's index will reflect the yield rate of related US assets. Historical data indicates that the gold price will be under pressure if the US dollar index rises, said Zhao.

On top of that, the economy in Europe is showing limited signs of a pickup as exports from the area won't improve in the short term. So, the US dollar will remain strong against that backdrop, which will also provide little room for an upturn in gold prices.

"Historically, gold prices would go up when the economic growth rate in the US started to slow down and the Federal Reserve started to loosen their currency policy. At present, we can see that the PMI (Purchasing Managers' Index) in the US is declining, indicating that the country's economic prosperity has reached a peak. The importance of investing in gold will be evident soon," he said.