The gold market has reached an important milestone as prices surged above $1,940 overnight. This briefly marked the entry into an official bull market. Analysts interpret developments and share their forecasts.
Gold has its best start to the year since 2012
Gold fell slightly from nightly highs, with prices rising nearly 20% from two-year lows seen in November. February Gold Futures was last traded at $1,938.70. With its bull market status, so far, the precious metal is up $100 in the first month of 2023. This is the best start since 2012. Gold’s renewed momentum is linked to continued suppression of bond yields and a seven-month low in the US dollar, analysts said.
Analysts say that changing interest rate expectations continue to be weighed on the dollar. The US Dollar Index (DXY) remains at its lowest point in seven months at 102 points. cryptocoin.comAs you can see, the markets have almost completely priced in the 25 bps increase the Federal Reserve will make next month. Ole Hansen, head of commodities strategy at Saxo Bank, underlined the following in a note Tuesday:
The yellow metal is finding fresh demand from traders and investors. Also, headwinds from last year’s rate hikes to rising yields and the dollar are turning into tailwinds as interest rates finally stall as yields and the dollar soften amid concerns over the economic outlook.
“There may be a significant rise in gold”
Ole Hansen says gold has historically seen significant rallies after a peak in interest rates. Therefore, he adds that he sees the potential for higher prices. In this context, the analyst makes the following assessment:
The market is currently forecasting one or two more US rate hikes before stalling at 5% or below. If history repeats itself, there could be a significant rise in gold.
“Gold prices may hit all-time high”
IG’s market analyst Jeremy Naylor says that while $1,940 is proving to be a bit of a sticky resistance for gold, if prices do break, there’s not much to stop it from hitting an all-time high. The analyst comments in a report:
We’re a long way from there, but certainly, in some people’s eyes, that’s the price point to go for.
“These may further stimulate the appetite for gold”
Lukman Otunuga, senior research analyst at FXTM, states that it is following the $1,950 resistance but the precious metal has significant momentum. Accordingly, the analyst makes the following statement:
The precious metal certainly continues its ups and downs, securing five consecutive weeks of gains. It could also go higher if the underlying drivers remain unchanged. Weak dollar and soft US economic data could further stimulate gold appetite in the next few days.
“We have yet to see demand for ETFs recover”
Although gold prices are in a technical bull market, some analysts point out that gold prices are technically overextended and some consolidation at current levels may be healthy. Ole Hansen states that one factor holding back the gold market remains pent-up demand for gold-backed exchange-traded funds. Hansen explains his views on this subject as follows:
We have yet to see demand for ETFs pick up. Total assets are still around 94 million ounces, a two-year low. Therefore, we did not see any recovery during the mentioned $320 rally. At the start of a new trading year, the confidence of traders always tends to be low for fear of making a wrong move. However, at the same time, FOMO (fear of missing out) can cause a rapid increase in positioning, which can then be left open when a change of direction occurs.
“Gold prices continue to see technical selling pressure”
Better-than-expected economic data prompted some investors to take profits at nine-month highs. Therefore, according to analysts, the gold market continues to see some technical selling pressure.
On Tuesday, the S&P Global Flash US Composite PMI reported better-than-expected activity for the manufacturing services sectors, although both indices remained in deep contraction territory. The report showed manufacturing PMI data rose to 46.8 from 46.2 in December. The data exceeded expectations; According to consensus estimates, economists had expected data of around 46. Service sector activity, on the other hand, rose to 46.6 in January from 44.7 in December. Economists had expected a pressure of around 45.3.
‘Fed can tighten more aggressively’
While the gold market stays outside its highs, it tries to protect its overnight gains after the economic data. S&P Global Market Intelligence Chief Economist Chris Williamson says recession risks continue to rise, although headline data was higher in January. In this regard, the economist makes the following assessment:
The US economy started 2023 on a disappointingly soft note. Moreover, business activity contracted sharply again in January. Although modest compared to December, the rate of decline is among the sharpest since the global financial crisis, the report said. This reflects falling activity in both the manufacturing and service sectors.
The report also noted that inflation remained high despite weak activity. Williamson explains:
The concern is that not only did the survey show a decline in economic activity at the beginning of the year, but the rate of input cost inflation accelerated in the new year, partly due to increased wage pressures. This, in turn, could encourage more aggressive tightening of Fed policy despite increased recession risks.
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