Inflation will keep gold prices above $1,900 even as the Fed raises rates - Scotiabank
(Kitco News) - The gold market continues to struggle as prices trade below $1,900 an ounce, and the Federal Reserve's monetary policy decision next week will continue to weigh on the precious metal; however, one market strategist still sees solid support for the precious metal through the rest of the year.
In a report published Monday, Marc Desormeaux, senior economist at Scotiabank, said that despite gold's recent more than 5% drop from $2,000, he is increasing his forecast for the precious metal.
The Canadian bank now sees gold prices averaging the year around $1,900, up from the previous forecast of $1,800.
Although Desormeaux is relatively bullish on gold, he added that the precious metal could struggle in the near term ahead of the Federal Reserve's monetary policy decision.
Markets are expecting the U.S. central bank to raise interest rates by 50 basis points. At the same time, the central bank is also looking to start reducing its balance sheet by $95 billion.
Along with next week's decision, markets are pricing in even further aggressive moves through the year. According to the CME FedWatch Tool, market sees interest rates rising as high as 3.25% by the end of the year.
Although the Fed is looking to aggressively tighten interest rates, Desormeaux noted that inflation will remain high.
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"Gold investors may be betting that the Fed will avoid the most aggressive path of policy action later this year for fear of slowing economic growth too significantly; that would presumably keep inflation—against which bullion is viewed as a hedge—higher for longer," he said. "The [gold price] upgrades reflect upward revisions to inflation forecasts since January 2022 and our expectations that negative real rates will persist for longer than previously anticipated."
Helping to keep inflation elevated is the broad-based rise in commodity prices. Scotiabank is raising their base metal price, with nickel prices expected to rise 50% this year.
At the same time, Scotia sees oil prices averaging 2022 around $103 per barrel.
Desormeaux added that gold prices should also remain well supported as a safe-haven asset due to Russia's ongoing war with Ukraine.