Commerzbank is looking past gold's selloff and ups its 2022 forecast to $1,900
(Kitco News) - Since last week, the gold market had lost nearly 5% when prices briefly tested resistance at $2,000. The market is struggling to attract new bullish momentum as it holds support above $1,900 an ounce. However, one international bank sees the precious metal well supported through the rest of the year.
Monday, Commerzbank announced that it was increasing its gold forecast for the year after a solid first-quarter performance. The German bank sees the precious metal averaging around $1,900 an ounce this year and sees prices pushing back to $2,000 in the second quarter.
In 2023, Commerzbank sees gold prices averaging the year around $2,000 an ounce.
Although gold has seen some strong selling pressure this past week, Carsten Fritsch, precious metals analyst at Commerzbank and author of Monday's report, said that it had been one of the top-performing assets since the start of the year, outperforming both bonds and equity markets.
"Gold is therefore in high demand as an inflation hedge and a safe haven. This is reflected in strong inflows into gold ETFs. The simultaneous massive rise in bond yields, on the other hand, could not stop the gold price increase but only slowed it down," he said.
Looking at investment demand, Fritsch pointed out that gold-backed exchange-traded funds have seen 14 weeks of consecutive inflows, with first-quarter holding rising by 269 tonnes of gold, its biggest increase since the third quarter of 2020.
Fritsch noted that gold, trading around $1,900 an ounce, continues to perform well in the face of growing headwinds as both the U.S. dollar and bond yields rise to multi-year highs. The U.S. dollar index has pushed solidly above 101, trading at fresh two-year highs. At the same time, bond yields rose roughly 3% before losing some ground this past week.
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However, Fritsch also noted that the yield curve has significantly flattened in the past month, raising concerns that the Federal Reserve's aggressive monetary policy path could push the U.S. economy into a recession.
"This could also be an explanation for the fact that the gold price was able to absorb the rise in yields so well until recently," he said.
Also helping gold prices is the fact that inflation continues to rise unabated. Although the Federal Reserve is expecting to raise interest rates by 50 basis points at its next two meetings, the central bank will still be seen as behind the inflation curve.
"Inflation is likely to remain at a higher level in the longer term, which will have a dampening effect on real interest rates. Whether central banks are ready or willing to raise key interest rates far above inflation rates remains to be seen. In addition, weaker economic data are likely to raise doubts as to whether interest rates will actually be raised as much as is expected on the futures markets," said Fritsch.
As for the U.S. dollar, Fritsch said that gold and the greenback are attractive safe-haven assets and could continue to run in the same direction as Russia's war with Ukraine weighs on global economic growth.
Looking ahead, Fritsch said that the path of inflation and the war in Eastern Europe are the two biggest factors that will drive gold prices.
"After the end of the war, however, interest in gold as a safe haven is likely to wane and gold ETFs will see outflows that will reverse at least some of the inflows recorded since the beginning of the year. A decline in the gold price would then be expected because the expectations of interest rate hikes that have been priced in and higher bond yields would have a greater impact," he said.