Growing optimism that the U.S. economy can avoid a severe recession even as the Federal Reserve maintains its hawkish bias continues to weigh on the gold market as prices trade near a six-month low.
However, analysts at the Australian-based bank ANZ said that despite short-term selling pressure, they are maintaining their bullish medium to long-term outlook on the precious metal. Daniel Hynes, senior commodity strategist and the lead author of their latest report, said that while he can’t rule out a drop below $1,900, he does see signs of solid support in the marketplace.
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“We believe the Fed is near the end of its hiking cycle, the USD remains in a structural downtrend and tightening credit conditions could be an economic risk,” Hynes said in the report. “These present a supportive backdrop for gold.”
Although ANZ remains bullish on gold, the current lackluster environment has caused the bank to push back its predictions for new record highs. The Australian bank now sees prices averaging around $2,050 an ounce by the fourth quarter of 2023. Prices are expected to reach new highs by the end of the first quarter of 2024, with an average price of around $2,100 an ounce.
The medium-term bullish outlook comes with December gold futures last trading at $1,933.60 an ounce, unchanged on the day.
In the near term, Hynes said that the biggest risk for gold is the growing ‘Goldilocks’ economic conditions that are developing.
“The US economy remains resilient, as evident in strong economic data. Moderating inflation and strong labor data present an ideal macroeconomic balance. As a result, the market has pushed out the possibility of a hard landing. This diminishes safe-haven flows for gold,” Hynes said.
However, with inflation continuing to ease from last year’s 40-year highs, ANZ expects that the Federal Reserve has reached peak interest rates. Haynes added that gold shouldn’t be spooked by the potential for one last rate hike.
“Real rates are likely to lift amid easing inflation. As a non-yielding asset, gold inversely tracks US real interest rates,” he said.
Although the U.S. economy has remained fairly resilient, ANZ doesn’t rule out the potential for a recession by the first quarter of the new year.
“While the probability of recession has decreased, the risk of an economic downturn is not completely off the table. Tighter credit conditions and softer demand for credit are normally associated with a risk of recession. Should this materialize in 2024, we expect investors to start hedging this economic risk by increasing their gold holdings,” the analysts wrote.
The analysts also said that despite ongoing liquidations in gold-backed exchange-traded products, the precious metal is in an excellent position to benefit when market sentiment starts to shift.
“We believe investment demand could quickly pick up once the market either gets confirmation on the pause of interest rate hike cycle or economic growth disappoints,” Hynes said.
Written for and published by KITCO ~ August 16, 2023
