The dollar strength ‘has been a headwind,’ analyst says

StanChart Executive Director of Precious Metals Research Suki Cooper joins Yahoo Finance Live to discuss commodities, investor sentiment in gold, and the precious metals space.

Video Transcript

AKIKO FUJITA: We'll do a quick check on the commodities space right now. And looking specifically at oil, we are seeing both WTI crude and Brent crude to the downside. WTI down about 2-- more than 2%. Brent crude down about 1.9% there.

For more on the commodities space, let's bring in Suki Cooper, StanChart executive director and precious metals analyst. Suki, good to talk to you. You've specifically been looking at gold right now, sort of, what has traditionally been more of a safe haven play, but it sounds like you think there's more downside to come.

SUKI COOPER: Gold has really been caught in the headwinds of the strength of the dollar and the scope for further rate hikes. And while we think that the Fed is not done with its rate hikes, I think there's another 75 basis points that's likely to come in the November meeting and another further 50 basis points in December. I think these are going to present strong headwinds for the gold market.

But we do think that the downside is quite well supported. We're seeing quite a good price elastic response in terms of demand from India and China. And there's still that concern around recession risk and perhaps the need for flight to safety that is buffering some of the downside for gold. But we do think that there's more downside risk to come as the year comes to an end. And into 2023, we see gold prices heading further towards 1,600 towards the end of next year.

AKIKO FUJITA: So 1,600, we're at 1,675 right now. Is 1,600 the support level you were talking about?

SUKI COOPER: The key support that's coming up next is around 1,650. So this is a level that we've seen physical demand materializing. And now we're entering a period where we tend to see seasonal demand from India. Diwali falls on the 24th this month. You have the wedding season as well. And we've seen in markets like China, the physical premium, earlier last month, swung to levels that we last saw in 2015.

So that price drop that we initially saw below 1,700 was greeted by quite strong physical interest in the gold market. So the next level to look at from here will be 1,650, and then beyond that is 1,600. If we breach those two levels, then we're really looking to the cost of production and where that provides a guideline and for the gold market.

And we tend to see in a long run basis-- and here, I'm looking at around about 40 years, that gold prices tend to trade 1/3 above the average cost of production. And that guideline suggests to us around 1,550 to 1,600 is where that flow from the production side should materialize.

AKIKO FUJITA: So much of the price moves, as you point out, really driven by the stronger dollar, and we have seen it climb up again today, looking at something like the Japanese yen, well above, or below, depending on how you look at it, those intervention levels. I mean, how much higher do you think the greenback goes, as you track those metals moving in tandem?

SUKI COOPER: It's really pivotal for the commodities complex as a whole. The dollar strength has been a headwind for not just gold, but for silver, platinum, and palladium. It's really dampened that upside risk. We think that there's likely that we may see further dollar strength. And perhaps we'll see something of a stabilization coming in the first part of next year. And that's really when we might see some of that pressure on gold prices starting to ease.

But if we look at the correlations for the gold market, its strongest consistent relationship since the start of this year has been with the US dollar. That correlation is jumping above 60% at the moment. But last year, that relationship had started to pivot towards real yields and nominal yields. That relationship still matters for gold. It's in close second. But at the moment, it's the strength of the dollar that's proven to be a key headwind.

Now it's not to say that gold can't rise if we see dollar strength. If both dollar and gold are benefiting from safe haven demand, we can see them both rally. But in the current environment, it's the concerns around slowing demand over the longer term. But there's also concerns around higher rates that's really weighing on gold. And it's not benefiting from safe havens [INAUDIBLE] at the moment.

AKIKO FUJITA: So bottom line, Suki, should investors be putting their money here, or is there a better value in the precious metals space?

SUKI COOPER: If we look at the entire complex, on a longer term basis, the industrially biased precious metals fundamentals are set to tighten. If we look at markets like platinum and palladium, we think that towards the end of this year, we're going to see much tighter markets as the auto market starts to recover. We were anticipating at the start of this year a rebound around about 11% in global auto production. But we've scaled back our expectations closer to 7%.

But into 2023, we're still expecting a double digit rebound in terms of global auto production. And PBMs are critical in terms of the growth that we see in the auto industry. So those are two markets where we're expecting more upside risk towards the end of this year. But on a longer term horizon, perhaps silver is the metal where we might see more upside risk, given the demand from the solar energy, given the electrification of vehicles. There's a strong growth that we're likely to see.

But that demand is likely to take two to three years to materialize. So over the longer run, silver has positive prospects. But over the next few months, we think there's more upside risk for platinum and palladium, at least in the short term.

AKIKO FUJITA: Suki Cooper is StanChart executive director and precious metals analyst. Good to have you on today.

SUKI COOPER: Thank you.