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Credit Suisse downgrades its average gold price forecast to $1,725

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(Kitco News) - Despite gold's resilience in the challenging environment of rising interest rates and a stronger U.S. dollar, the precious metal faces growing bearish sentiment, according to one market analyst.

In a note published Wednesday, commodity analysts at Credit Suisse said they are lowering their gold price forecast for this year because of the rising interest rates and real yields. The Swiss bank now sees gold prices averaging the year around $1,725 an ounce, down from the previous estimate of $1,850 an ounce.

"The downturn in gold prices is a sharp reversal of the price performance at the beginning of 2022, including when gold briefly traded above $2,000/oz in early March on safe-haven demand due to the Russia-Ukraine war. The geopolitical trade was short-lived, with gold declining in subsequent weeks as central banks around the world began to raise rates to combat inflation," the analysts said in the report.

The bank is leaving its 2023 average price forecast unchanged at $1,650 an ounce. For 2024 the analysts see gold prices averaging the year around $1,600 an ounce, down from the initial estimate of $1,650. The long-term price forecast remains unchanged at $1,450 an ounce.

Fahad Tariq, lead author of Credit Suisse's updated forecast, said that downside risks in the gold market are growing. He added that given where interest rates are and surging momentum in the U.S. dollar, gold's current fair value should be around $1,590 an ounce.

"This indicates that gold prices have decoupled from real rates in recent months and are being supported by safe-haven demand, or from a singular focus on high inflation. To us, this suggests downside risk if the bear case outlined above materializes," the analysts said in the report.

Is gold's short squeeze over as hedge funds reluctant to make major bullish bets?

The most significant factor that continues to dominate the gold market remains the Federal Reserve, Credit Suisse said. The U.S. central bank's aggressive interest rate hikes pushed the U.S. dollar to a 20-year high last month and have pushed real yields into positive territory after starting the year nearly negative 1.00%.

Currently, market volatility remains elevated as markets see a nearly 50/50 chance that the Federal Reserve will raise interest rates by 75 basis points next month. Credit Suisse noted that the Federal Reserve remains laser-focused on getting inflation under control, even if it pushes the economy into a recession. The analysts said that this stance remains a strong headwind for gold.

Although Credit Suisse has downgraded its gold price forecast, the analysts see some bullish potential if there is a protracted recession, which would drive safe-haven demand for gold or if rising government debt levels force the Federal Reserve to abandon its aggressive rate hikes.

In the current environment, Tariq said that investors should focus on senior gold producers in top-tier jurisdictions as they will be able to better control costs.

Credit Suisse's top mining picks are: Agnico Eagle, Endeavour Mining, Barrick Gold, Yamana, and Triple Flag.

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