Asian equities received a boost Thursday morning as oil traded near highest levels in 4-months and the Yen fell for 7 consecutive days.

European stocks also indicated a positive open after slipping back yesterday on reports that the ECB will consider tapering its bonds purchase program by early 2017.  Although markets don’t seem really buying the news it still managed to move some asset classes especially gold which dropped by more than $50 an ounce since Tuesday.

Is the yellow metal’s rally over?

Gold has had a great performance so far in 2016, and although prices dropped by 4% since Oct-3 it’s still one of the best performing asset classes with 19.2% gains year-to-date. Of course speculations over a Fed rate hike and other central banks normalizing monetary policy are not good news for the yellow metal which benefited from a world of negative interest rates.

The recent selloff in gold was over exaggerated due to speculative positioning and breaking key technical support levels which triggered stop losses in derivatives markets. If U.S. non-farm payrolls report on Friday surprised to the upside we might see additional pressure on gold. However, I still see couple of factors likely to support prices on the short to medium term.   

  • Long term investors and physical consumers have been on standby for some time, and probably this dip will provide a good opportunity to jump in.
  • China, the largest gold consumer is on a long Golden Week holiday, and we’re likely to see some interest when markets open on Monday.
  • Demand in India picks up during the festival and wedding season that runs from October to December.
  • According to World Gold Council a recent survey showed 90% of 19 central bank reserve managers planning to increase or maintain their gold reserve levels.

Although I’m not a big fan of non-yielding assets, I still believe that gold has an important role in portfolios. There’s lot of uncertainties going into 2017, with market’s valuations overstretched, looming banking problems in the EU, Brexit’s aftermath, China’s growing mountain of debt, and the list goes on. That’s why I still believe gold is an essential asset to hedge against all those risks.    

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