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Gold prices to push higher as Fed faces reality of lower rates - BNP Paribas

Kitco News

Editor's Note: In an updated comment to Kitco News, Harry Tchilinguirian said that as of Oct. 9, after his commentary was published, BNP Paribas expects the Federal Reserve to lower interest ratses at the end of the month, followed by three more rate cuts.

(Kitco News) - Although the Fed has been reluctant to acknowledge that it has embarked on a new easing cycle, one market analyst said that the central bank won’t be able to ignore the reality for much longer.

In a commentary for the World Gold Council, Harry Tchilinguirian, head of commodity research at BNP Paribas, reiterated his call for lower interest rates through the first half of 2020.

“That would mean that, by the end of this cycle, the upper bound on the Fed fund’s rates would be 1.25%. Given that nominal yields tend to fall with Fed cuts, real rates could move and stay in negative territory, raising the appeal of holding gold as long as economic uncertainty persists,” Tchilinguirian said in the commentary. “Should the Fed prove more aggressive than we assume, gold is likely to move above our forecast for that period.”

Although falling bond yields are expected to provide support for gold, Tchilinguirian said he sees a resilient strength in the U.S. dollar as a headwind for the precious metal.

Traditionally, monetary policy easing is negative for the U.S. dollar; however, Tchilinguirian explained that there are other mitigating circumstances including new easing measure from the European Central bank, which are expected to weigh on the euro. At the same time, the U.S. dollar could continue to see safe-haven interest in the midst of the ongoing trade war between the U.S. and China.

“With these trade differences likely to take a long time to resolve, we suggest that the US dollar is more likely to be a mitigating than a supporting factor for gold. Over time, we believe that demand for gold will be motivated primarily by a low rate environment,” said Tchilinguirian.

But, gold is also more than just an insurance play. Tchilinguirian said that he expects rising inflation pressure to be the next factor to drive gold prices higher after the Federal Reserve stops easing interest rates in the second half of next year.

“For now, however, interest in gold is clear from the options market. [As of Oct. 1] the market was pricing out of the money gold call options much above their equivalent put options, reflecting sentiment that gold prices have more upside than downside risk,” he said.

Tchilinguirian comments for the WGC come a month after he updated his price forecasts for gold and silver. Currently the French bank expects gold prices to push through $1,600 in the first quarter of 2020 and average the year at $1,560 an ounce.

On Wednesday, gold prices remained below last month’s lows but continued to hold critical support above $1,500 an ounce. December gold futures last traded at $1,511.80 an ounce, up 0.52% on the day.

Gold prices have found new support after Federal Reserve Chair Jerome Powell said at an event in Denver Colorado on Tuesday that the central bank will expand its balance sheet, but the growth should “in no way be confused with the large-scale asset purchase programs.”

Powell was also non-committal on the future direction of interest rates ahead of the central bank’s monetary policy meeting at the end of the month.

“Looking ahead, policy is not on a preset course,” he said. “The next FOMC meeting is several weeks away, and we will be carefully monitoring incoming information.”

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