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Gold’s strong rally likely to continue as interest rates are cut, says UBS

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Investing.com — has seen a rally in recent months, driven by a combination of macroeconomic factors and geopolitical uncertainty. 

As per analysts at UBS, this upward trend is expected to persist as key market conditions continue to evolve. The primary catalysts for this sustained rally include impending interest rate cuts, a weakening U.S. dollar, and persistent geopolitical risks. 

UBS sees gold as a preferred hedge against these uncertainties, suggesting that its strong performance is far from over.

One of the key factors supporting gold’s rally is the expectation of future interest rate cuts by central banks, particularly the U.S. Federal Reserve. 

As inflationary pressures ease and concerns over economic growth rise, central banks are expected to shift towards a more accommodative monetary policy. 

“We retain the view that a 150-200bps shift in short-term yields across developed economies over the next 12-18 months will lead to greater investment in the year ahead,” the analysts said.

Lower interest rates tend to make gold more attractive to investors, as it reduces the opportunity cost of holding non-yielding assets like gold. 

With the U.S. Federal Reserve signaling a possible pivot towards rate cuts, gold’s safe-haven appeal is likely to strengthen, driving further inflows into the market.

The decline of the U.S. dollar is another critical factor in gold’s recent performance. Historically, gold prices and the U.S. dollar have an inverse relationship. 

As the dollar weakens, the price of gold in other currencies becomes more affordable, increasing global demand.

UBS expects the U.S. dollar to continue losing strength as a result of monetary easing and a softening U.S. economy. This weakening trend is expected to amplify gold’s allure, particularly in emerging markets, where currencies have been under pressure due to high U.S. interest rates​.

In addition to macroeconomic factors, UBS analysts point to ongoing geopolitical uncertainties as a key driver of gold prices. 

Geopolitical risks, such as the conflict in Ukraine and tensions in the Middle East, are expected to persist beyond the U.S. presidential elections. 

These uncertainties enhance gold’s role as a safe-haven asset, particularly for investors seeking protection from market volatility.

UBS believes that these geopolitical factors will likely fuel further investment demand for gold. 

This is reflected in the increasing inflows into gold-backed exchange-traded funds (ETFs), which have been rising steadily over the past few months​.

Investment demand, particularly through gold ETFs, is set to be a significant driver of gold’s next rally. UBS notes that inflows into these funds have gained momentum, reversing earlier outflows and narrowing the year-to-date decline. 

As investors turn more risk-averse in light of the uncertain global economic outlook, gold ETFs are expected to attract increased interest​.

Another critical source of demand for gold has been central banks, which continue to diversify their reserves away from the U.S. dollar. This trend, often termed “de-dollarization,” is expected to further boost gold prices. 

UBS analysts suggest that central bank purchases of gold are likely to remain robust as countries seek to reduce their reliance on the U.S. dollar amid heightened global tensions​.

UBS forecasts that gold’s price could reach new heights in the coming year, with a target price of $2,700 per ounce by mid-2025. This outlook is driven by the convergence of interest rate cuts, a weakening dollar, and sustained geopolitical risks. 

The brokerage sees the potential for gold to outperform other asset classes, particularly as traditional equities face headwinds from a cooling global economy.

Commodities

Labor dispute stops Canadian canola oil, forestry exports from West Coast

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By Ed White

(Reuters) – Canada’s exports of canola oil and forest products from West Coast ports have halted due to a labor dispute, producers said on Thursday.

The stoppage, which started on Monday (NASDAQ:), involves limited strike action by the longshore foremen and a full lockout of Local 514 of the International Longshore and Warehouse Union by the B.C. Maritime Employers Association.

While bulk grain shipments are exempt from the British Columbia action, canola oil and forestry products are not covered by that federal labor code provision and are not being loaded onto ships at Pacific ports.

Based on the market price of canola oil, each day without shipments represents C$4 million in lost revenue, said Chris Vervaet, the executive director of the Canadian Oilseed Processors Association, which says it represents about 95% of Canada’s canola and soybean crush capacity.

“We really implore the government to get involved and really help both sides to a resolution.”

Federal Labor Minister Steven MacKinnon has said both sides have a responsibility to reach an agreement. On Thursday he criticized the lack of apparent progress between the union and employers as well as a smaller shutdown affecting some container traffic at the Port of Montreal.

“Both sets of talks are progressing at an insufficient pace, indicating a concerning absence of urgency from the parties involved,” said MacKinnon in a post on social media platform X.

Vervaet said Canada exports about one million metric tons of canola oil through the Port of Vancouver yearly.

Canada is the world’s top exporter of the oilseed, and canola oil is the most valuable part of the crop.

© Reuters. International Longshore and Warehouse Union Local 514 members and supporters march to the Port of Vancouver amid a labour dispute, in Vancouver, British Columbia, Canada November 8, 2024. REUTERS/Jennifer Gauthier

The Forest Products Association of Canada also called for federal government intervention.

Wood, pulp, paper and byproduct shipments by the organization’s members make up about 17% of Vancouver’s container exports and 14% of Montreal’s.

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Commodities

Oil slips as investors digest US election fallout

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By Alex Lawler

LONDON (Reuters) – Oil slipped on Thursday, extending a sell-off triggered by the U.S. presidential election, as a strong dollar and lower crude imports in China outweighed supply risks from a Trump presidency and output cuts caused by Hurricane Rafael.

Donald Trump’s election win initially triggered a sell-off that pushed oil down more than $2 as the dollar rallied. But crude prices later pared losses to settle at a less than 1% decline by the end of Wednesday’s session.

futures fell 63 cents, or 0.8%, to $74.29 a barrel by 1253 GMT on Thursday. U.S. West Texas Intermediate (WTI) crude lost 73 cents, or 1%, to $70.96.

Downside factors include a strong dollar and sluggish demand, while upside pressures come from potentially increased sanctions on Iran and Venezuela under Trump, as well as conflict in the Middle East, said Saxo Bank analyst Ole Hansen.

“Some of these potential drivers will have no impact in the foreseeable future, but they all add up to the current narrative leading to rangebound trading,” he said.

“Absent any major geopolitical escalation, the short-term outlook leans toward downside risk in my opinion.”

The dollar held near four-month highs on Thursday as investors prepared for several central bank decisions, including from the U.S. Federal Reserve. A strong dollar makes oil more expensive for other currency holders and tends to weigh on prices.

“Historically, Trump’s policies have been pro-business, which likely supports overall economic growth and increases demand for fuel,” said Priyanka Sachdeva, senior market analyst at Phillip Nova. “However, any interference in the Fed’s easing policies could lead to further challenges for the oil market.”

Further downward pressure came from data showing that crude oil imports in China fell 9% in October – the sixth consecutive month showing a year-on-year decline – as well as from a rise in inventories.

Trump is expected to reimpose his “maximum pressure policy” of sanctions on Iranian oil exports. That could cut supply by as much as 1 million barrels per day (bpd), according to Energy Aspects estimates.

© Reuters. FILE PHOTO: A pump jack operates in an oil field in Midland, Texas U.S. August 22, 2018. Picture taken August 22, 2018. REUTERS/Nick Oxford/File Photo

In his first term, Trump also put in place harsher sanctions on Venezuelan oil. Those measures were briefly rolled back by the Biden administration but later reinstated.

Actual, rather than feared, supply cuts also lent support. In the U.S. Gulf of Mexico, about 17% of crude output or 304,418 bpd has been shut because of Hurricane Rafael, the U.S. Bureau of Safety and Environmental Enforcement said.

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Commodity prices fall after Donald Trump elected US President

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By Naveen Thukral, Emily Chow and Nina Chestney

SINGAPORE/LONDON (Reuters) -Commodities from oil and gas to metals and grains dropped on Wednesday as the dollar rallied and victory for Republican Donald Trump in the U.S. presidential election stoked concerns about tariffs and economic growth.

Trump recaptured the White House by securing more than the 270 Electoral College votes needed to win the presidency, following a campaign of dark rhetoric that deepened the polarization in the country.

Oil prices fell by more than 1% on pressure from the U.S. dollar rally, which was set for its biggest one-day rise since March 2023 against major peers. [USD/]

Investors believe Trump’s presidency will bolster the dollar as interest rates may need to remain high to combat inflation that would stem from new tariffs.

A stronger U.S. dollar makes greenback-denominated commodities such as oil more expensive for holders of other currencies.

Precious metals also fell, with gold sliding to a near three-week low, while lost more than 2%, making it the worst performer of the base metals complex.

“Gold will be torn between the risk of rising inflation, potentially slowing the pace of U.S. rate cuts, as tariffs are rolled out and continued demand for safe haven assets,” Ole Hansen, head of commodity strategy at Saxo Bank, said.

Commodity prices started to fall overnight as traders started to price in the likelihood of a Trump win.

“This scenario is expected to bring about the promised tariffs on imported goods, particularly targeting China, potentially triggering a new wave of trade tensions and economic disruptions,” Hansen added.

However, Trump could renew sanctions on Iran and Venezuela, removing oil barrels from the market, which would be bullish, said UBS analyst Giovanni Staunovo. Iran exports about 1.3 million barrels per day.

Benchmark European gas prices also fell by nearly 3% amid concerns about gas supplies and Trump’s stance on the Middle East conflict and Russia-Ukraine war.

China’s industrial metals and steel industries could face headwinds as Trump has pledged to impose blanket 60% tariffs on Chinese goods to boost U.S. manufacturing.

“China’s steel prices will undertake more downward pressure if Trump wins the election, and domestic steelmakers may face even more severe losses,” said Ge Xin, deputy director at Lange Steel Research Centre. 

“This is because Trump will be more aggressive in terms of measures against China.”

The copper market was pricing in the possible roll-back of U.S. electrification initiatives, including subsidies for electric vehicles, which would dampen demand.

Agricultural commodities were also hit, with soybean futures in particular trading lower. Wheat and corn were seen as less exposed to renewed trade tensions with China.

A stronger dollar makes U.S. grain more expensive overseas, while tariffs proposed by Trump could disrupt U.S. agricultural trade, with soybeans particularly reliant on sales to leading importer China.

© Reuters. FILE PHOTO: Soybean plants begin to show signs of growth at Mark Tuttle's soy farm in Somonauk, Illinois, U.S., May 30, 2024.  REUTERS/Jim Vondruska/File Photo

There are also fears that China could respond with retaliatory measures, potentially reducing U.S. exports of key crops and creating downward pressure on prices.

Shares in European clean energy companies also fell as Trump has vowed to scrap offshore wind projects through an executive order on his first day in office.

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