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IHS Markits Predicts One More Rate Hike; Gold Prices To Fall Another 2.5%

Kitco News

(Kitco News) - The gold market, struggling to push back above $1,300 an ounce, could face further headwinds later in the year as one research firm sees one more interest rate hike on the horizon.

In a report Wednesday, economists at IHS Markit said that they expect the Federal Reserve to raise interest rates by the end of the year, which would be the last hike in the current tightening cycle.

“Muted inflation and few signs of significant fiscal imbalances provide the Fed with an opportunity to be patient as it awaits further information. The late-2019 rate hike is expected to be the final rate hike for this tightening cycle,” the analysts said.

IHS’ outlook is swimming against the market current. The CME FedWatch Tool shows that markets are currently pricing in a nearly 60% chance that the U.S. central bank cuts interest rates by the end of the year.

For some gold analysts, The Federal Reserve’s recent dovish pivot on monetary policy is one reason why gold prices have been able to find long-term support at its 200-day moving average around $1,266 an ounce.

KC Chang, precious metals analyst at IHS said in an email to Kitco News, that his firm’s outlook does provide some downside risk to gold prices through the end of the year.

He added that he sees gold prices trading at the low end of their current range at $1,250 by year end. Chang’s target represents a nearly 2.5% decline in gold from current prices. June gold futures last traded at $1,281 an ounce, down 0.35% on the day and near session lows.

Not only will higher interest rates keep a cap on gold prices through the year, but Chang added that one more rate hike will provide further support for the U.S. dollar.

“Interest rate differentials between central bank policy rates will help the U.S. dollar have relative strength compared to the Yen and the Euro. This will be downward pressure on gold prices,” he said.

Chang added that he also doesn’t see a lot of inflation-hedge demand for gold in the near term.
“In addition, inflation expectations for the United States and other mature economies remain well-anchored. This will reduce investment demand for gold as well,” he said.

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