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Gold price to find its luster again by Q2 of 2023 when interest rates peak - BMO Capital Markets

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(Kitco News) - Headwinds weighing on the gold price through most of 2022 are expected to turn into tailwinds by the second quarter of 2023 as U.S. interest rates and the U.S. dollar top out at the start of the year, according to one Canadian bank.

In its latest gold market report, analysts at BMO Capital Markets said that they expect gold prices to hold relatively steady for the next few months and make another run back above $1,700 an ounce by the second quarter of 2023. The bank sees prices averaging around $1,680 an ounce between April and June next year.

"What's interesting here for us is that we're expecting gold prices to remain fundamentally well-supported, even out to 2026. We have our gold price average of $1,600 an ounce, really not expecting a sharp retracement in prices from where we are today," said Rory Townsend, an associate at the Canadian-based bank and author of the latest gold report. "And that partly is on inflation remaining stickier for longer, that is also partly on slower growth over the outlook period, and it's also on the elevated geopolitical risk remaining."

The Federal Reserve's aggressive monetary policy stance continues to be the dominating force for gold as rising interest rates have supported the U.S. dollar at its highest level in 20 years. However, Townsend said that he expects the Fed Funds rate to go much above the Federal Reserve's own estimate for a terminal rate of 4.6%.

"There still naturally are risks to the very tight labor market in the U.S., that inflation could continue to push higher, we could see potentially a resurgence of energy prices into the winter months, which may well keep inflation higher for longer, but I think that sort of 4.6% should be enough to curtail demand, and start to pull down, some of those inflationary pressures that we're facing," Townsend said.

Premiums for gold and silver bullion aren't dropping any time soon - LBMA

However, markets are expecting a higher terminal rate above 5%, according to the CME's FedWatch Tool.

BMO Capital Markets also noted the growing dichotomy in the precious metals market as substantial outflows in gold-backed exchange-traded products contrast with healthy physical demand, specifically from China.

However, Townsend added that if gold prices are going to turn around, investment demand needs to improve.

"If we are going to see the gold price move materially higher, or at least hold sustained levels above $1,700 an ounce, we will need to see buying sentiment improve amongst macro asset allocators once again, and more sustained net inflows," Townsend said.

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