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Gold's $1,900 price target is a 'high hurdle,' but positioning points to more gains - Standard Chartered

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(Kitco News) The $1,900 an ounce gold price target will be a tough one to breach on a sustainable basis in the short term, but technical positioning points to more gains in the second half of the year, said Standard Chartered.

"Gold has struggled to retain the $1,900/oz level as the market has shifted focus from higher than expected inflation to tapering concerns," said Standard Chartered precious metals analyst Suki Cooper. "Investor positioning is less crowded than during gold's previous foray above USD 1,900/oz, which bodes well for further price gains in H2-2021. The last time gold prices traded at US1,900/oz, net fund length was 17% higher, gold-backed ETPs were 4% higher (142t), and investor positioning was much greater."

One indicator Cooper pays close attention to is the exchange-traded products (ETPs). And the latest data suggest that the $1,900 level would prove to be strong resistance in the short term.

"ETPs rose by 50t in May for the first time since September, but short interest in ETPs at one-month high suggesting $1,900/oz could be a high hurdle in the near term," Suki wrote on Friday.

Gold has been seeing a supportive macro environment with higher inflation expectations, weaker U.S. dollar, and fairly tamed U.S. Treasury yields, keeping prices well bid.

One of the biggest risks to the gold price outlook is the Federal Reserve's talk of tapering. Still, Standard Chartered does not expect the central bank to introduce anything new until the Jackson Hole symposium in August.

"A strong NFP recovery would put the focus back on Fed communication, especially following higher PCE inflation and the more hawkish-than-expected Fed minutes. We expect the Fed to remain on the sidelines at least until Jackson Hole in August," Cooper said.

Markets are currently pricing the first rate hike by March 2023, with all eyes on the upcoming June FOMC meeting.

"Markets will look to the June FOMC meeting for guidance and watch whether data leading up to the meeting disappoints. For now, gold maintains a strong correlation with the USD and real yields, and its correlation with U.S. equity markets has strengthened," Cooper pointed out.

Gold's physical demand also supports the higher price outlook. Central banks, for example, remained net buyers for the second month in a row, with the year-to-date net buying at 168 metric tons.

"The latest data shows net buying of 68.2 tonnes (t); this follows net buying of 91t in March, boosted by Hungary adding 68t, trebling its gold reserves. While existing buyers such as Kazakhstan and Uzbekistan continued to add to their reserves in April, Turkey swung back to becoming a net buyer after being a net seller for the past five months, adding 13.4t in April," Cooper noted. "Thailand joined in, adding 43.5t to its gold reserves, its first addition since 2019 but also its largest in at least two decades (for example, it added 52.9t in all of 2011)."

On top of that, China's April trade data show an improvement, with gold imports rising to 110.8t compared to 4.2t in April 2020.

"The Swiss trade data for April confirms trends across India and China. Gold shipments to key physical hubs rose sharply in April; shipments to Hong Kong were the highest since January 2020, and to China the highest since 2019. But shipments to the U.S. and the U.K. picked up from low levels, suggesting physical demand was the key driver in April. In light of the impact of the COVID variant, the May data is likely to show physical demand slowed, particularly in India, but given recent consumer appetite, we expect the physical market to recover further in H2," Cooper said.

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