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IHS Markit Sees Gold Market Running Too Far Ahead Of Economic Fundamentals

Kitco News

(Kitco News) - Gold and financial markets could be getting a little bit ahead of themselves when it comes to aggressive monetary policy action, according to one analyst.

In a telephone interview with Kitco News, KC Chang, precious metals analyst at IHS Markits said that he expects to see gold prices fall back to around $1,300 an ounce by year-end as his firm's economists expect the U.S. central bank cut rates less than expected through the rest of the year.

"The rally we have seen in gold prices in the last three weeks has run a little too far ahead of what the economic fundamentals suggest," he said.

The comments come as gold prices continues to hold on to critical support above $1,400 an ounce. August gold futures last traded at $1,408.20 an ounce, down 0.30% on the day.

Chang said that the Fed could signal a one-and-done rate cut in July as the U.S. economy remains relatively healthy.

"IHS expects the Fed to make an insurance cut in July and then remove it one year down the road," he said. "It's a little premature for markets to price in three rate cuts by year end."

Chang added that recent data still shows some robust growth in the U.S. economy. He noted that it's difficult to justify aggressive rate cuts when the economy continues to enjoy full employment with the unemployment rate hovering at a 50-year low.

IHS' outlook could fit with the recent comments from Federal Reserve Chair Jerome Powell during his two-day semi-annual testimony before Congress.

Powell noted that the U.S. economy saw strong growth in the first half of the year; however, he signaled that the central bank is prepared to lower interest rates as growing uncertainty and weak global growth weighing on economic potential for the rest of the year.

"Our baseline outlook is for economic growth to remain solid, labor markets to stay strong, and inflation to move back up over time to the Committee's two percent objective. However, uncertainties about the outlook have increased in recent months," Powell said in his opening remarks to Congress. "In particular, economic momentum appears to have slowed in some major foreign economies, and that weakness could affect the U.S. economy."

Not only will less aggressive monetary policy weigh on gold in the second half of the year, but Chang noted that gold prices at $1,400 an ounce will reduce physical demand around the world.

"Gold has gotten pretty expensive in a matter of two to three weeks," he said. "We should expect to see a pullback in physical demand in the next six months."

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