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Risks Events Need To Evolve Into Something Bigger For Gold To Sustain Its Gains - CRU

Kitco News

(Kitco News) - There are enough isolated risk events on the horizon to keep gold supported in the short term and could eventually drive prices through $1,300 an ounce, but if these events don’t pan out, prices could end the year back near at $1,200 an ounce, according to one precious-metals analyst.

In a telephone interview with Kitco News, Kirill Kirilenko, precious-metals analyst at CRU, a U.K.-based research firm, said that simmering geopolitical risks are helping to keep gold elevated.

These include growing tensions with North Korea; French elections, with first-round voting this Sunday; Germany elections in the fall; the potential for a U.S. debt ceiling crisis; and Tuesday’s surprise announcement of a U.K. election in June.

However, he warned that for gold prices to be sustainable, the market will have to see some type of escalation in risk as a result of these events. If that doesn’t pan out, gold could end the year only slight higher from where it started.

He reiterated his firm’s outlook for gold prices to average $1,250 an ounce this year. Improving risk sentiment in financial markets is already weighing on gold as prices fall from their recent five-month high. June Comex gold futures last traded at $1,279.30 an ounce, down more than 1% on the day.

“It is like trying to kick a ball up a hill. You have to keep kicking the ball for it to go higher and if you miss then the ball will fall back down,” he said.

Kirilenko added that instead of all these isolated events, the gold market really needs just one major story to spark a sustainable bull rally.  For example, he noted that the financial crisis helped propel gold higher in 2007 and then inflation fears in reaction to the recession led to all-time highs in gold four years later.

“The end of the inflation fears was the end of the last gold bull market,” he said.

While inflation could once again be a major driver for gold, Kirilenko warned that investors also have to deal with a U.S. central bank that is anxious to raise interest rates. CRU economists are expecting to see two more rate hikes later in the year.

Kirilenko said that this would be enough to keep inflation expectations in check and as a result lower gold’s potential. Recent data has prompted markets to reduce their expectations for a June rate hike; currently CME 30-day Fed fund futures are pricing in a 49% chance of a move. However, Kirilenko said that there is still a lot of data to be released before the June 14 decision.

Looking at current prices, with gold trading near a five-month high, Kirilenko said that valuations are a fair reflection of market conditions and while the market has potential to push higher, he doesn’t see another 11% rally.

“The current environment will be risky enough to sustain prices for now,” he said “But come October if none of these events evolve into something bigger, then we could see prices back down to $1,200 an ounce, especially if the Federal Reserve continues to tighten interest rates.”

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