Gold Will Trade in This ‘Uncharted Territory’!

Gold prices slumped after testing record levels a week ago. However, the yellow metal managed to stay above the $2,000 level. On the other hand, the uncertainty in the market has not disappeared yet. Experts share their views on the route that gold will follow.

It is possible for gold to be traded in this uncharted territory

In its latest note, the Australian and New Zealand Banking Group (ANZ) says gold is in a wide range of $1,900 to $2,100 as ETF investors wake up in light of renewed recession risk, after testing record levels a week ago. ANZ commodity strategists Daniel Hynes and Soni Kumari comment:

The upside channel marks a wide range between $1,900-2,100. Although prices have reached record highs, the Relative Strength Index (RSI) does not show an overbought level.

For gold to see another significant rise, it must break the critical resistance of $2,062. Hynes and Kumari said, “Exceeding this level may trigger new technical buying. Also, it is possible for prices to trade in the $2,100 uncharted territory,” he writes. At the same time, they add that any hawkish Fed sentiment will trigger a sell-off to $1,900.

This situation increases the safe harbor demand for gold.

ANZ expects gold to reach $2,100 by the end of this year. It also predicts that it will reach $2,200 in the second half of next year. According to the bank, any price drop will be viewed by investors as a buying opportunity. Demand for ETFs will be a major new driver, finally realizing the value of gold amid rising recession fears. In this context, strategists make the following statement:

We expect gold ETF flows to turn positive for the remainder of this year. Problems in the US banking sector, high interest rates and uncertainty about the debt ceiling weaken the economic outlook. This increases the safe harbor demand for gold.

Fed Chairman Jerome Powell reassured markets that the US banking system is “solid and resilient.” However, contagion risk fears still dominate trading. Hynes and Kumari share the following comment:

Last year’s rate hikes of about 500 bps are putting pressure on the US banking system. The Fed recently announced that approximately 722 banks reported unrealized losses of more than 50% of their capital at the end of the third quarter of 2022. This is likely to prompt investors to increase strategic gold allocations for risk diversification. Gold ETF holdings are up a net 56 tons since the Silicon Valley Bank crisis.

Emerging markets are hoarding gold because…

cryptocoin.comAnother big unknown is the US debt ceiling crisis. Just over two weeks until June 1st. During the debt ceiling negotiations in 2011, the credit rating of the United States was lowered, which led to a fall in the US dollar and an increase in gold prices. On top of that, the US economy is slowing down. Many analysts predict a recession in the second half of the year. In addition, US-China tensions and central banks’ gold purchases increase the safe-haven appeal of gold.

ANZ points out that emerging markets are hoarding precious metals as a way to avoid sanctions. In this context, he states that Russia, China, India and Turkey have been the leading gold buyers in the last ten years. Strategists make the following assessment:

Russia and China made about 60% of total purchases between 2010-22. This will likely continue, although the drivers of this activity may change. Gold purchases will increase as China aims to increase the CNY’s role as a reserve currency. And gold is a tempting proposition for Russia, which is grappling with sanctions. Although gold does not fully protect against sanctions risks unless it is stored domestically, it does play a role in reducing the impact of sanctions.

While there is inflation, gold normally maintains its value!

Another aspect of this trend is the devaluation of the US dollar, which fits perfectly with ANZ’s forecast for higher gold prices. Strategists underline that since the 1970s, the US dollar index has depreciated by 20% in nominal terms, while gold has risen 51 times. The US dollar has been in a downtrend since it peaked in September 2022. Also, it is possible that slower economic growth and debt ceiling concerns will further erode confidence in the US dollar. From this point of view, strategists make the following statement:

The depreciation of the dollar is another factor pushing emerging market central banks to diversify their reserves. While currencies lose their purchasing power due to the monetary expansion, where they increase the money supply by printing money, gold normally maintains its value.

Such decreases in the price of gold are a buying opportunity.

One risk to this bullish outlook for gold is that the Fed surprised markets with a hawkish turn in June after signaling a pause in its tightening cycle. On this subject, strategists make the following comments:

The Fed pointed to a possible pause at its next meeting in June. However, sticky core inflation and a strong labor market suggest that further tightening is not off the table. Consensus forecasts are for a rate cut in 2023. However, our basic estimation is that there will be no interest rate cuts in 2023. An unexpected policy action could trigger price corrections. However, in our opinion, such decreases should be perceived as buying opportunities.

Uncertainty about the direction gold prices are expected to follow

Money managers remained relatively stable in their gold positions. Economists at TD Securities expect long positions to rise as data turns convincingly negative. According to economists, there is definite uncertainty about the direction gold prices are expected to go. Some speculative investors think that gold is trending higher due to the Fed pause that announced the long position increases. In contrast, others say prices tend to decline in response to a solid dollar, higher interest rates, and bond sales. Based on this, economists come to the following conclusion:

Markets will need to see more economic data before money managers have a more one-sided view of where the yellow metal is headed. For now, money managers are likely to want to continue cutting positions. However, when the data turns convincingly negative and the Fed is on track to meet its inflation target, long positions will rise strongly.

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