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Latest gold selloff could be a buying opportunity ahead of Q1 rally - Standard Chartered

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(Kitco News) - The gold market's latest price drop could be a buying opportunity as the Federal Reserve is still expected to be in no hurry to raise interest rates despite who is sitting at the head of the table, according to one analyst.

In a report published Friday, Suki Cooper, precious metals analyst at Standard Chartered Bank, said that she sees higher prices for gold through the first quarter of 2022 as the market continues to focus on rising inflation pressures and lower real bond yields.

"We believe that many of gold's headwinds have been priced in – from USD strength to the Fed tapering timetable – and prices have held up well. While these headwinds could re-emerge, downside risks to growth, plus elevated inflation and our expectations for the USD to weaken and real yields to remain deeply negative, suggest price dips are likely to be viewed as good buying opportunities," Cooper said in the report.

Standard Chartered is looking for gold prices to average the first quarter around $1,875 an ounce, representing a 3% gain from Monday's price. The gold market dropped sharply below critical support at $1,835 an ounce after the White House announced that President Joe Biden will nominate Jerome Powell to remain as Chair of the Federal Reserve.

Gold prices dropped Monday as the U.S. dollar pushed to a new high for the year. December gold futures last traded at $1,816.60 an ounce, down nearly 2% on the day. While gold is reacting to U.S. dollar strength, Cooper said that correlation is starting to break down. It might be better to watch gold's relationship with real yields, she added.

"Gold had been tracking the USD most closely for the bulk of the year, with the three-month rolling correlation exceeding 70% in some months. While the relationship remains strong, it has weakened towards 30% over the past two weeks," she said. "The three-month rolling correlation with real rates has strengthened, closing in on 50%, while the three-month rolling correlation with nominal yields has closed in on 60%. The realignment of this relationship bodes well for gold prices, as the move in real yields suggests further upside."

Cooper added that gold has been responding to the rising inflation threat. She noted that markets will get another critical inflation report later this week with the release of the Personal Consumption Expenditures Index. She said that Standard Chartered expects PCE to rise 4.2% for the year, the highest reading since 1991.

"The gold market is concerned about elevated inflation risk but also does not believe that central banks will react hawkishly to high inflation prints immediately," she said.

Cooper also noted that after dismal investor interest in gold, the market is starting to level out.

"Flows are on track to mark the largest annual outflow since 2013," she said. "Net redemptions have been a key drag on the market this year, and should they stabilise, gold prices are likely to gain upward momentum."

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.