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Gold could benefit as March rate hike unlikely - TD Securities

Kitco News

Welcome to Kitco News' 2022 outlook series. The new year will be filled with uncertainty as the Federal Reserve looks to pivot and tighten its monetary policies. At the same time, the inflation threat continues to grow, which means real rates will remain in low to negative territory. Stay tuned to Kitco News to learn from the experts on how to navigate turbulent financial markets in 2022.

(Kitco News) - Gold prices remain trapped around $1,800 an ounce as investors expect the Federal Reserve to aggressively tighten its monetary policy through 2022 to combat rising inflation pressures.

However, Bart Melek, head of commodity strategy at TD Securities, said that markets projections for central bank tightening might be a little too ambitious, which could support gold prices in the near term.

According to the CME FedWatch tool, markets are pricing in four rate hikes this year, with the first move coming as early as March. At the same time, comments from the U.S. central bank suggest that not only is it looking to end its monthly bond purchase by March, but it could start reducing its balance sheet before the end of the year.

However, Melek noted that sometimes what the Federal Reserve wants to do and what it can do, are not always aligned. He added that the government's growing debt low and still relatively high unemployment levels could keep the Fed on the sidelines in the first half of 2022.

"The possibility of weakish economic data in the aftermath of the Omicron variant and somewhat less inflationary pressure manifesting, along with the lack of strict inflation targeting, are all factors likely to keep the US central bank from pulling the trigger on a hike in March, as the consensus increasingly expects," Melek said in his latest precious metals report.

Melek said that he remains positive on gold for the first half of the year and sees potential for prices to push past $1,850 an ounce in the near term. He added that there is significant bearish speculative positioning in the gold market. Any shift in interest rate expectations could create some short-term short covering.

Hedge funds shy away from gold as markets expect aggressive Fed tightening

 While real interest rates will start to push higher, they still remain in deep negative territory, Melek said.

"[Federal Reserve Chair] Jerome Powell is no hawk, and there is a long way to go to operate at full capacity. Policymakers will continue to make policy in response to the numbers," he said. "Any rate increases will not turn policy restrictive for a while yet."

However, Melek said that the precious metal could face some tough headwinds later in the year.

"While negative real rates along the curve should protect gold from a full-blown rout, the yellow metal is projected to trade in the mid $1,600s for much of H2-2022," he said. "It is expected that the combination of inflation expectations, nominal rates and Federal Reserve policy signals will again determine how gold behaves in 2022.

TD Securities is also not very optimistic on silver either as U.S. monetary policy could weigh on the precious metal.

"An environment which will be dominated by talk of Fed tightening is unlikely to generate significant investor confidence to grow long silver exposure needed to generate a sustained rally, negating the upside pressure coming from firm industrial demand and relatively weak supply growth," he said.

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.