2 Critical Gold Price Prediction: These Levels Are Coming!

Stubborn inflation pressures could cause the Federal Reserve to raise interest rates over the summer, according to Lombard Odier, a private Swiss bank. However, that won’t stop gold from reaching all-time highs. According to UBS, the price of gold will reach $2,200 as central banks continue to buy gold.

Lombard Odier: A.gold price goes for $2,100

In its latest gold outlook, Swiss bank Lombard Odier raised its year-end price target to $2,100 from its previous target of $1,940. Stéphane Monier, Lombard Odier’s chief investment officer, notes that despite rising interest rates, rising economic uncertainty should continue to support gold as a safe-haven asset until 2023. In the report, Monier makes the following assessments:

Persistent price pressures and slowing economies around the world have pushed inflation-adjusted gold prices to levels in line with past periods such as the market stress of the early 1980s, the European sovereign debt crisis and Covid. Looking ahead, we see recession risk, the eventual peak in real interest rates and the weakening US dollar. These will also affect the demand for gold. Hence, it will continue to support the metal’s potential to be traded higher for the rest of the year.

Fed won’t cut rates before early 2024

Lombard Odier’s bullish view on gold came at a time when gold was consolidating around $2,000. Markets are getting used to the idea that the Federal Reserve will raise interest rates by 25 basis points next month. That’s why gold has a hard time getting consistent gains. Markets have also begun to delay the timing of a possible rate cut until after the summer. In its report, Monier says that although headline inflation has dropped sharply from last year’s peak, core inflation remains consistently high, which excludes volatile food and energy prices. Based on this, Monier makes the following comment:

This means that there is little reason for the Fed to pause tightening for now. We also expect a 25bps rate hike at the May meeting and perhaps another of the same magnitude in June or July. Our expectation is that US interest rates will peak at around 5.5% with the CPI around 3% by the end of 2023. In addition, we expect that the Fed will not cut interest rates before the beginning of 2024.

Gold remains a portfolio diversifier

Monier says that in the current environment, gold may be slightly overextended in the short term. However, he also states that despite the recent price movement, it continues to be an important portfolio diversifier. He adds that in a volatile market, he trades gold through options markets. Monier said, “At this stage of the market cycle, we exercise short July 2023 gold put options with a strike value of approximately $1,900 for 3% of the nominal amount of the portfolios. This allows us to increase our portfolio risks when the gold price weakens.”

The rally for the gold price is not over yet!

cryptocoin.comAs you follow, gold is among the best performing assets in 2023. While the price of gold was trading around $2,000, it has risen 9.2% to date. UBS states in a note that the rally is not over yet. In this context, he makes the following statement:

The highlight of the rally was solid central bank demand and the return of financial investors to the market. Exchange-traded funds (ETFs) and futures and options markets all recorded the strongest demand in more than a year. March was the first month of net inflows from ETFs in almost a year.

mebank demand is a quadratic gold price driving force

UBS predicts that central banks’ gold purchases will take another year. Such demand usually does not directly affect prices. However, the record levels witnessed recently are making an undeniable impression. UBS points out the following in the note:

Traditionally, central bank demand is considered a second-order price driver. That’s because buying activity rarely meets the same scale as flows related to ETFs, hedge funds, and other investment claims. But all that changed in 2022. Central bank purchases were strong last year. While the share of central banks in total demand was 8-14% between 2011 and 2019, it became 23% in 2022.

UBS cites the HSBC Reserve Management Trends Survey, which took part in 83 central banks, revealing that more than two-thirds of respondents think their colleagues will increase their gold holdings in 2023. The two main reasons for higher demand are geopolitical and high inflation risks. In this regard, he makes the following statement:

Looking at 2023, official purchases so far have been more than 120 metric tons. If it continues at this rate, annual purchases will be around 750 metric tons. While this will mean a slowdown in the uptake rate, if this level is reached, it will be the second highest in history after last year’s record of 1,136 metric tons.

Year-end gold price forecast: $2,100

It is possible that demand will slow down due to the rising gold price. However, market-driven volatility and de-dollarization trend will continue to be supportive factors that push central banks to buy more gold. The gold price climbed around $150 in the first four months of the year. UBS says gold is likely to gain another $100 by the end of the year. In the note, he expresses his prediction as follows:

We prefer buying under the context of the portfolio. We also anticipate that prices will reach $2,100 by the end of December and $2,200 by the end of March 2024.

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