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Bank of America sees five interest rate hikes starting in 2022, but neutral rate will be capped at 2%

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(Kitco News) - Gold prices have a chance to push back to $1,900 an ounce through most of 2022. Still, the precious metal will be caught between higher inflation and higher real interest rates, according to analysts at Bank of America.

In its latest global economic report, the bank noted that the Federal Reserve's monetary policy remains the biggest threat to the precious metal.

"Central banks are moving closer to policy normalization, with the U.S. economy leading. Rising real rates and a strong USD remain a key headwind to the yellow metal," the analysts said in the report. "Spiking oil prices are adding macro volatility too, but inflation is mostly perceived as transitory. And tightening output gaps should push central banks towards normalizing policy rates."

Although Bank of America sees potential for higher gold prices next year, gains could be limited. The market analysts are pretty aggressive with their interest rate expectations. The bank said it sees the Federal Reserve raising interest rates five times, with the first rate hike coming in the fourth quarter of 2022.

"We see risks around our forecast as to the high side. Rates could move higher if covid outlook improves, supporting growth expectations, if inflation remains more persistent than expected, and if employment recovers quickly near-term. Increased concern over high inflation becoming more lasting, potentially driven by a continued supply / demand mismatch could also prompt higher inflation breakevens and nominal rates," the analysts said.

According to the CME FedWatch Tool. Markets are forecasting the Federal Reserve to raise interest rates by June 2022. Markets see interest rates rising to between 0.75% and 1.00% by February 2023.

Bank of America analysts added that the economic data would determine the trajectory of interest rates.

"The data over the next several months will be critical for the Fed. If we see signs of relief on the supply-side, it will leave the Fed comfortable to continue to guide that the end of tapering does not mean the start of hikes and that liftoff is unlikely until the end of next year. But the Fed will need to hike earlier if supply-side constraints and elevated inflation persist, wage inflation picks up and inflation expectations continue to climb," analysts said.

Although the Federal Reserve is expected to lead central banks in rate hikes, Bank of America does see a lower neutral rate environment going forward.

"The Fed will likely be limited in how high they can raise rates due to structural inflation headwinds (technology, demographics, globalization) & growth that will decelerate meaningfully in the years ahead. A higher quantity of debt incurred since the pandemic risks level of interest rates that the economy can tolerate before slowing; this suggests a relatively low neutral rate of interest likely between 1.75%-2% for 10Y USTs," the analysts said.

A neutral rate tapped out at 2% is also gold's long-term saving grace, according to the analysts.

"Our rates strategists note that 10Y rates above 2% will raise concerns over debt sustainability; equity markets may also come under pressure at that level. This means that real rates will likely remain negative in the future," the analysts said. "All in, while gold may find support, we ultimately believe headwinds persist and the upside may be limited near-term."

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.