The US Federal Reserve stated that more rate hikes are needed to control inflation. Subsequently, gold saw a weekly drop despite a recovery on Friday. Analysts interpret the market in the light of the latest developments and share their estimations.
“Yellow metal is having a bearish week for this reason”
Spot gold rose 0.8% to $1,791.59. But it has lost about 0.3% this week. US gold futures traded at $1,800.20, up 0.7%. Edward Moya, senior analyst at OANDA, comments:
Many traders are focusing on both the Fed and the ECB, which are signaling further tightening. We’ve also seen global bond yields rise significantly. Therefore, gold is having a bearish week.
“Gold takes a measured offer of safe harbor”
The Fed increased interest rates by 50 bps on Wednesday, as expected. Fed Leader Jerome Powell said the Fed will increase further next year, despite growing concerns about calm. The ECB and BOE also gave signals of their peer rate hike strategies. In a note, Kitco Metals senior analyst Jim Wyckoff highlights:
On Friday, gold strengthened with a corrective bounce from the strong selling pressure in the previous session. U.S. and global stock markets are selling after major central banks are still hawking. In this environment, it’s possible that gold is getting a measured offer of safe haven.
“These continue to be headwinds for gold investors”
Michael Hewson, chief market analyst at CMC Markets, says gold prices are reacting to the massive rise in bond yields in Europe as a result of hawkish statements from the European Central Bank.
According to Rob Haworth, senior investment strategist at Bank Wealth Management, gold prices jumped in midweek amid weak inflation data and hopes that the Fed will soon end their rate hikes. However, Haworth draws attention to the following points:
The hawkish announcement by the Fed late Wednesday weighed on gold as investors were pricing in a higher final interest rate. Higher interest rates and softer inflation information continue to be headwinds for gold investors.
“The resistance in gold prices is in stark contrast to the crash in 2013”
The Fed’s latest economic claims show that top Fed officials expect to keep interest rates above 5% by 2024. Adrian Ash, director of research at BullionVault, comments:
As interest rates rise with the dollar, the dollar reduces gold’s appeal as an unyielding safeguard. Still, the resistance in bullion prices this year stands in stark contrast to the crash in 2013. It also contrasts with the worst year in living memory for stock/bond portfolios.
Ash says the cost of gold as a portfolio diversifier will draw attention around the new year, both because of seasonal rebalancing and because January brings the Chinese New Year and is currently the heaviest single gold-buying fest in the world. According to Ash, these two factors mean that gold will typically see a strong rise in January.
“Precious metals performance depends on real returns”
Looking ahead, however, Matthew Miller, equity analyst at CFRA Research, expects industrial metals to rise and price metals neutral to slightly lower. In this context, Miller says:
As long as real yields are positive and rising, expensive metals are likely to underperform.
ANZ raises gold’s end-2023 target to $1,900
Economists at ANZ Bank have raised their gold price claim to $1,900 for the end of next year. Analysts see scope to rewatch recent gains in the short term. They state that this will largely be behind a stronger dollar. Based on this, analysts make the following assessment:
Investor position shows non-trading shorts reached a valuable level in the third quarter of 2022. But some of these positions have cropped up as expectations for a slower rate hike cycle have developed. As global growth slowed in the second quarter amid heightened geopolitical risks, we expect safe harbor purchases to push up the gold price. Subsequently, we increased our year-end (2023) target to $1,900.
“There is a decrease in the price of gold first”
In mid-December, the gold price almost returned to its year-on-year level. However, it has had a very eventful year. Economists at Commerzbank predict that the yellow metal will actually rise to $1,850 by the end of 2023. But before that, they expect it to drop to $1,750 early next year. Economists explain their predictions on this issue as follows:
We expect the gold price to initially drop to $1,750 until it becomes clear that the Fed’s rate hike cycle is over. According to Fed Fund Futures, the market is still seeing the interest rate peak at just under 5%. In the short term, there is a need for an upward adjustment in interest rate expectations, which should put pressure on gold.
“It is possible for gold to shine again”
According to economists, there will likely be a period of unchanged interest rates after the last rate hike in March and before the Fed actually cuts rates again towards the end of 2023 due to a weak economy and low inflation. Based on this, economists make the following comment:
The Fed does not foresee this now. As soon as the Fed adopts this view, gold should rise again. We think that this will be the case in the second half of next year. Gold will likely also be supported by the weakening of the US dollar, which our currency strategists expect. We expect gold to rise to $1,850 from the second half of the year to the end of 2023.