The gold price eased on Friday amid the pressure of the stronger dollar. However, it is on track to post its fifth consecutive weekly gain, as hopes for slower rate hikes in the US boost the appeal of gold. Analysts interpret the market and share their forecasts.
“This is an important factor supporting the strength of gold”
A Reuters poll shows that the Federal Reserve will end the tightening cycle after a 25 basis point increase at its next two policy meetings, and then likely hold interest rates steady for the rest of the year. OCBC FX strategist Christopher Wong comments:
Gold has softened a bit more, but is still trading near recent highs. Amid signs that pressures to lower inflation are becoming more entrenched, the theme of Fed policy calibration is a key factor underpinning gold’s strength.
“Gold price may see $2,000 this year”
cryptocoin.comAs you follow, Wednesday’s data showed that US producer prices fell more than expected in December. This, while providing evidence that inflation has receded, strengthened the claims that the Fed could slow down rate hikes. Yeap Jun Rong, IG Market strategist, comments:
It is possible for gold to hit $2,000 this year. But for that, we need to see a drop in hawkish tone to confirm the Fed’s current market rate hike expectations.
“The gold price rally will accelerate further!”
Brian Lan, managing director of Singapore-based GoldSilver Central, said: “There are signals that the US is probably entering a recession. This will be in favor of gold,” he says.
“There is an escape to safety,” said Jeffrey Sica, CEO of Circle Squared Alternative Investments. The gold price looks better as the markets are down,” he comments. In addition, the analyst states that the US dollar is weakening and this is one of the reasons why we see a rally in gold. According to the analyst, the rally will accelerate from here on out.
Meanwhile, Sevens Report Research analysts made the assessment on Thursday:
The fact that US growth data is falling faster than inflation, coupled with the Fed’s outright hawkish chatter, was enough to ignite a wave of profits from gold yesterday.
“There is potential for gold to rise further”
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, underlines the following in a note:
Gold is bidding above the $1,900 level and the positive pressure is supported by lower U.S. yields that reduce the opportunity cost of holding the noninterest bearing yellow metal and softer U.S. dollar.
Özkardeskaya says that technically overbought conditions after the recent rise of gold ‘hint that we may see a small downside correction in the short term. But he adds that ‘levels between $1,855 and $1,900 are interesting to collect gold’. According to the analyst, there is potential for gold to rise further, especially if stocks fall as U.S. bond yields continue to loosen.
“Three factors affect the price of gold”
Despite the lackluster performance of gold in 2022, its price has increased by 16.9% in the last three months. Gold has seen a surprise rally recently. According to Gold & Precious Fund Portfolio Manager Alain Corbani, this rally will continue until 2023.
Corbani, who has three decades of experience in senior financial roles, including being the Director of Capital Markets at RBC, says three factors influence the price of gold. These are inflation, the strength of the US dollar, and the Federal Funds rate. “The gold price is going up as they all either stall or reverse,” Corbani says. In this context, Corbani makes the following statement:
All three of these important data started a reverse movement. They’ve stopped the summit and are moving south. We’ve had a rebound in the gold price because the data from the inflation front, the weakening of the US dollar and the falling interest rates have all triggered new interest in gold.
Relationship between real interest rates and gold price
Corbani says that in addition to the 3 factors he mentioned, gold prices are also affected by real interest rates. The real interest rate is the difference between the nominal interest rate and inflation. Corbani explains his view on this issue as follows:
Two variables that are strongly negatively correlated with the gold price are real interest rates and the US dollar. If I have a clear vision of the direction of the real rates and the direction of the US currency, then I can make a decision about the gold price.
Rising interest rates make gold less attractive to investors compared to coupon-bearing assets such as bonds. Corbani also hints that inflation is weakening the US dollar, which has traditionally been considered a safe-haven asset. If investors stay away from the dollar for hedging, they turn to gold. Corbani finally notes:
When things go wrong, the safe haven is usually the US dollar, otherwise gold. When the markets are under too much stress, gold will be penalized.
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