(Aug 31): After nosing above US$1,300 ($1,761.63), gold is winning new fans as tepid US inflation anchors Federal Reserve policy and President Donald Trump’s growth agenda risks running into the sand.

The metal should trade above that level in 2018 as the dollar weakens and the Fed sticks to just two rate hikes, in December 2017 and then March, according to Luc Luyet, a currency strategist at Pictet Wealth Management, a unit of the Pictet Group, which managed US$500 billion as of the end of June. Luyet’s “constructive” call is based on inflation lagging the Fed’s 2% target and Trump’s administration failing to deliver any significant fiscal boost.

“Given the fact that inflation should remain relatively low, we do not expect the Fed to be capable of doing much more than one hike in 2018,” Geneva-based Luyet said in an interview this week. “The dollar should be penalised next year by the weaker growth outlook and by the less active Fed, so we would expect the dollar to gradually weaken and that should support gold.”

In April, Luyet flagged the possibility of a retreat toward US$1,100 an ounce, and had a neutral call on bullion. Gold has since rallied to the highest since November as conflict looms over North Korea’s nuclear ambitions, which has also hurt stocks and buoyed Treasuries. While such geopolitical uncertainties are difficult to predict, tensions between Kim Jong Un’s regime and the US are supportive of gold, Luyet said.

Spot gold was around US$1,308 an ounce on Thursday and the metal is 14% higher this year, while the Bloomberg Dollar Spot Index has lost 9%.

The greenback should rebound from these levels -- and gold falter in the short term -- once the Fed unveils its plan to shrink its balance sheet in September, and then hikes at the end of the year amid a relatively strong US economy, said Luyet, 43, who has five years’ experience covering currencies and precious metals.

“I would use the rebound in the dollar to re-enter the gold market at the lower price,” said Luyet, who forecast the metal possibly dipping to US$1,250.

Other Bulls
Other bulls include billionaire Ray Dalio, who leads the world’s largest hedge fund at Bridgewater Associates. He’s recommended investors place as much as 10% of their assets in gold as a hedge against political and economic risks. Bullion could rise to US$1,400 by early next year, buoyed by lower long-term US interest rates and lack of progress by Trump in delivering economic reform, according to Bank of America Merrill Lynch.

Others aren’t buying. Any view of bullion as a long-term investment requires an assessment of the path of real interest rates, said Nicholas Johnson, a managing director and portfolio manager at Pacific Investment Management Co.

“When rates fall, the opportunity cost of holding gold falls, which pushes gold prices higher and vice versa when rates rise,” said Johnson at Newport Beach, California-based Pimco, which had US$1.61 trillion under management as of June. “We view gold as locally rich at the moment relative to real rates on both a short-term and long-history measure. As such, we favour selling it.”