Surge of pound helps jewellers in restocking gold01 Feb 2018
By David Brough
February 1, 2018 - A soaring pound since the start of 2018 is an opportunity for UK jewellers to restock dollar-denominated gold at a more affordable price, and the trade will keep a close eye on the exchange rate impact of unfolding Brexit talks in coming months.
The pound has rallied over 5 percent against the dollar since January 1 and posted its strongest monthly rise since May 2009, emboldened by optimism over the UK economy and progress of Brexit talks with the EU.
If the UK government makes advances in the next stage of Brexit talks, and moves forward more quickly than expected in negotiations with the EU, the pound could strengthen further against the dollar.
Meanwhile, investor worries over a U.S. tax overhaul, which could boost the fiscal deficit, have dragged on the dollar.
The dollar fell in recent weeks after the U.S. Federal Reserve (Fed) raised interest rates, as widely expected by financial markets, in December and signalled three more rate increases in 2018 as the U.S. economic recovery gains momentum.
Gold prices eased on February 1, a day after the Fed kept interest rates unchanged, with expectations that more U.S. rate rises were in the pipeline this year.
A backdrop of rising U.S. rates tends to dampen prices of non-interest-bearing bullion.
“It is likely that with the Fed signalling a March hike, there will be many market participants choosing to take profits should the Fed turn more hawkish than expected,” TD Securities said.
Gold was likely to consolidate in the near term even though the metal may be headed toward $1,400 an ounce yet this year, it said.
Gold was down 0.6 percent at $1,337.46 an ounce on February 1.
The outlook for gold prices in 2018 will be tied to prospects for more U.S. rate rises, competition from alternative asset classes such as equity markets and bitcoin, Chinese and Indian physical demand for the yellow metal, and geo-political uncertainty.
For example, any sudden surge in tensions in the Korean peninsula could potentially trigger another gold rally.
For UK jewellers, the biggest concern is risks of high volatility in the exchange rate of the pound against the dollar, which would strengthen the case for seeking a hedging solution for re-stocking gold.
But realistically a hedging strategy is feasible mainly for the larger players in the industry.
Prospects for higher UK interest rates, and the impact of inflation, could strengthen the pound.