Rising interest rates have dragged gold from near-record highs six months ago to their lowest since April 2020, but analysts expect a recovery in the coming months as interest rates rise slowly.
Traditionally seen as a ‘safe haven’, gold prices soared above $2,060 an ounce in March after Russia sent troops to Ukraine, sparking a showdown with the West.
But rapid monetary tightening in the US has since pushed the dollar to its 20-year high, making dollar-denominated gold more expensive for many buyers. It also increased yields on government debt, making non-performing gold less attractive.
Investors responded by selling. Gold is now at about $1,650 an ounce, down 20% from its March high, and US gold futures speculators are betting on further declines.
“U.S. monetary policy is firmly in the driver’s seat,” said Carsten Menke, an analyst at Julius Baer.
If US yields climb to 3.75%, which markets expect in November, gold could fall to about $1,580, Menke said, and if rates hit 5.5%, gold could fall towards $1,285.
The technical picture is also bleak. Gold is “locked in a bearish channel” with support at $1,645 and above it at $1,606, said Tom Pelc, a technical analyst and chief investment officer at Fortu Wealth.
But analysts are looking ahead to when interest rates stop rising and begin to fall — something they believe should deflate the US dollar, lower bond yields and help gold.
Financial markets are forecasting a spike in Fed fund interest rates next year, and possible cuts by the second half of 2023.
“If the gold price falls, that’s a buying opportunity,” Menke said, predicting gold could rise towards $1,900 next year.
Analysts at Citi said gold would likely bottom in September or October and prices would average $1,775 an ounce in the last quarter of this year and $1,870 in 2023.
Bank of America predicts gold will average $2,100 by 2023.
Geopolitical instability following Russia’s attack on Ukraine and fears that high interest rates will destroy economic growth without halting inflation – a condition known as stagflation – are also supporting precious metals.
Both scenarios encourage investors to buy gold as a safe store of value.
Gold is currently trading around $600 an ounce above its “fair value” based on interest rates, consensus inflation expectations and dollar strength, analysts at Australian bank ANZ said.
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