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Société Générale sees gold prices falling to $1,550 in 2023 and recovering to $1,900 by 2024

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(Kitco News) - Persistently high inflation will remain a headwind for gold as higher consumer prices will force the Federal Reserve to keep interest rates elevated through most of next year, according to analysts at Société Générale.

The French Bank released its updated commodity forecast and analysts said that they see gold prices falling to $1,550 an ounce by the third quarter of 2023 as real interest rates remain elevated.

"Our U.S. rates strategists expect the Fed to stop hiking rates by the end of this year but real rates to remain well into positive territory until 3Q23 at least," the analysts said in their latest price forecast. "Amid positive real rates in the U.S. and increasing ones in Europe, investors will likely shy away from non-yielding assets such as gold, and we expect a large 200t of outflows from gold ETF holdings. We expect the geopolitical risk around Ukraine to persist next year, but market participants are integrating this risk into their strategies as it and its consequences become somewhat more predictable."

The updated forecast comes as gold prices continue to struggle as the Federal Reserve is expected to maintain its aggressive monetary policies through the end of the year and into next year. August's Consumer Price Index demonstrated how persistence inflation pressures have been.

Tuesday, U.S. Labor Department said its annual Consumer Price Index rose to 8.3% last month, significantly beating expectations. Economists were expecting to see a 8.1% rise as energy prices dropped in August.

Although gasoline prices declined by more than 10% last month, the report highlighted broad-based inflation in food, shelter and medical costs.

Ahead of the report, markets were expecting the Federal Reserve to raise interest rates by 75 basis points but have since started price in a full 1% move next week. Markets also see U.S. interest rates rising as high as 5% in the first quarter of next year.

While gold could struggle for the next 12 months, analysts at the French bank see a light at the end of the tunnel. Although market expectations shifted dramatically Tuesday, Société Générale said that it sees the Federal Reserve halting rate hikes in the first quarter of next year. The analysts added that the U.S. central bank could start easing interest rates again by the end of the third quarter of 2023.

"After 3Q23, gold's fortunes should reverse, as our economists expect a mild U.S. recession in early 2024 and sluggish E.U. and China growth. Investors are likely to hedge such risks by transferring part of their allocations to gold. At this point, we would expect the Fed to turn dovish again, with inflation somewhat under control albeit higher than before COVID," the analysts said.

The bank said that by the end of next year, they look for gold prices to grind higher to $1.650 and push back to $1,900 by the end of 2024.

Investment demand in gold-backed exchange-traded products will remain the dominant force in the marketplace. Analysts at SocGen said that further outflows in 2023 will continue to be a drag on prices.

"As real rates are expected to continue to rise and the geopolitical risk around the Ukraine war is getting increasingly digested by markets, we expect strong outflows to materialise to the end of this year, bringing the full-year net outflow to 50t. In fact, even after the expected 2022 liquidations, holdings should remain elevated at around 3,000t, some 50% above the five-year pre-COVID average. This leaves plenty of room for hefty outflows in 2023, when we expect the drop in holdings to accelerate, as real rates will likely remain high enough to push investors away from non-yielding assets such as gold," the analysts said in the report.

"We expect total outflows for 2023 to reach 200t. The situation should reverse in 2024 and 2025 as returns from real rates become non-material again, the U.S. enters recession and European and Chinese growth struggles," they added.

SocGen also noted that a resilient U.S. economy, which avoids a recession next year, would put further pressure on gold prices as it would support the U.S. dollar.

However, a prolonged recession would provide some support for gold prices next year.

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"A deeper recession than we forecast in 2024 (with a slowdown in 2023) may force central banks to loosen policy again, which would weigh on the dollar, making real rates negative and in turn prompting significant ETF flows. Moreover, a decline in economic conditions would affect corporate earnings, and the stock market could witness further corrections over the next 12 months, boosting gold prices. Increased geopolitical risk would also be supportive of gold," the analysts said.

Despite the dismal outlook for most of 2023, SocGen does see some positive aspects in the gold market. The analysts said that physical demand for the precious metal should increase next year by 3.8% as Indian and Chinese consumers enter the market again.

The bank also expects central bank demand to provide critical support for the precious metal.

"For 2023 and beyond, we believe that geopolitical factors and gold's resilient performance amid economic turmoil should continue to encourage central banks to add gold, especially those looking to reduce exposure to dollar-denominated portfolios," the analysts said.

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