A Canadian bank expects the headwinds that put pressure on the price of gold for most of 2022 to turn into a tailwind as US interest rates and the US dollar peak at the start of the year in the second quarter of 2023. Commerzbank strategists say rising interest rates will continue to weigh on the yellow metal. TD Securities’ strategists say don’t look at gold as a safe haven.
“We do not expect a sharp pullback in the price of gold”
In their latest gold market report, BMO Capital Markets analysts said they expect gold prices to remain relatively stable for the next few months and to bounce back above $1,700 by the second quarter of 2023. The bank predicts prices will average around $1,680 between April and June next year. Rory Townsend, a partner at the Canada-based bank and author of the latest gold report, says:
What’s interesting for us here is that gold is basically well supported even until 2026. Our gold price average is $1,600. We do not expect a sharp pullback in prices from where we are today. And it’s partly to do with inflation staying stickier for longer. Partly due to slowing growth during the outlook period. It is also related to the persistence of high geopolitical risk.
“There are risks that inflation will continue to rise”
Rising interest rates support the US dollar at a 20-year high. Therefore, the Federal Reserve’s aggressive monetary policy stance remains the dominant force for gold. But Townsend expects rates to rise well above the Federal Reserve’s latest estimate of 4.6%. Townsend explains:
Due to the very tight labor market in the US, there are naturally still risks that inflation will continue to rise. Potentially, we will see energy prices rebound during the winter months. This will likely keep inflation higher for a longer period of time. But I think it’s possible that this kind of 4.6% would be enough to curb demand and start to pull down some of the inflationary pressures we’re facing.
“This is what it takes for gold to rise significantly”
However, markets are expecting a higher terminal rate of over 5%, according to CME’s FedWatch Tool. BMO Capital Markets also points to the growing dichotomy in the precious metals market as key exits for gold-backed exchange-traded products, particularly contrasting with the healthy physical demand from China. But Townsend adds that investment demand should improve if gold prices reverse. Based on this, Townsend notes:
If we’re going to see gold rise significantly, or at least hold steady above $1,700, we’ll need to once again see buy sentiment improve and more sustained net inflows among macro asset allocators.
“Interest rate hike speculations are putting pressure on gold”
cryptocoin.com As you can follow, gold fell below the low level recorded on Friday. Commerzbank strategists see it as unlikely that central banks will stop the marches. Therefore, he predicts that the yellow metal will continue to be under pressure. In this context, strategists make the following statement:
Gold’s relative weakness is likely related to still high and almost unchanged rate hike expectations, fueled by persistent hawkish comments from Fed and ECB representatives.
“Don’t look at gold as a safe haven!”
Strategists at TD Securities say aggressive Fed rate hikes will continue to put pressure on the precious metal as inflation expectations remain high. Strategists make the following statement on this subject:
A flat and inverted yield curve has historically been associated with a slower growth outlook and simultaneously rising gold prices. But this cycle, the growing persistence of inflation poses a constraint for the Fed. This shows that a restrictive interest rate regime will last longer than historical precedents. In this context, gold prices are unlikely to rise with a worsening growth outlook until the Fed makes progress in fighting inflation.
Strategists note that US wage growth trends confirm short-term household inflation expectations. However, it is far from the 2.5% rate that is consistent with the Fed’s inflation target. The CPI has settled at levels that will sustain an inflation rate of 5-6% in the future. Finally, the strategists underline the following points:
In turn, do not count on investors to whet their appetite for the yellow metal. Physical demand for bullion remained high. Seasonal assessments, however, suggest that this wind will likely ease soon after India’s festive season.
