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A fundamental shift is driving gold prices closer to $1,800 - MKS' Shiels

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(Kitco News) - Gold's new bullish momentum is more than just technical market repricing; the precious metal's ability to hold new critical support levels could indicate a longer-term fundamental shift, according to one market analyst.

In a recent note to clients, Nicky Shiels, head of metals strategy at MKS PAMP, said that the biggest factor supporting gold's new uptrend is shifting investor expectations regarding the Federal Reserve's monetary policy. Although the Federal Reserve will continue to raise interest rates through the early part of 2023, the pace is expected to slow down. At the same time, inflation pressures will remain elevated.

According to the CME FedWatch Tool, markets firmly expect the U.S. central bank to raise the Fed Fund’s rate by 50 basis points next month.

"Fed has shifted from being too late (and then too fast with super-sized rate hikes), and now with midterms behind us, they are not going to be able to hike enough to bring inflation sustainably lower," said Shiels. "It's a higher inflation regime for longer, with a relatively slower Fed."

Although gold's path won't be a straight line to $1,800 an ounce, that target is starting to materialize, she said. The gold market has managed to hold on to last week's gains, its best performance in roughly two years. December gold futures last traded at $1,771.80 an ounce, up 0.14% on the day.

"Overall, it’s likely precious pulls back, but it's an opportunity to re-engage and add length to capitalize on a new bull market trend," she said. "Yes, gold has the uncanny ability to consistently disappoint, but when major technical breakouts are aligned with major Fed policy pivots, that should be respected."

The rally in gold is also confirmed by a solid selling in the U.S. dollar, with the index falling to a roughly three-month low below 110 points. At the same time, U.S. bond yields have dropped sharply below 4%.

"Technically, there's a handful of very clear and coordinated signals coming through in both the U.S.$ (topping out in September) and U.S. yields," Shiels wrote. "Perhaps bonds haven't quite yet bottomed and US$ quite yet topped, but they are closer to it, which creates tailwinds for gold which has been fighting a very tough macro environment since the Fed started hiking."

Shiels also noted that adding to the current momentum is the fact that precious metals are significantly under-owned by retail and institutional investors. She pointed out that gold ownership represents about 0.5% of equity market assets under management, down considerably from the 2011 peak of 1.5%.

Economic outlook turns 'gloomier' than the IMF's October estimate

As to what will continue to drive gold prices higher after a relatively quiet and complacent summer, Shiels said that she sees several risks in the marketplace, making gold an attractive long-term safe-haven asset.

She noted that the chaos in crypto markets is destroying significant wealth and investors are feeling a lot of pain. She added that the implosion of FTX, a major crypto exchange, could boost the appeal of tangible assets.

Finally, with the mid-term elections over and Republicans expected to control the House of Representatives, Shiels said that fiscal concerns could start to rise, threatening the stability of the U.S. dollar.

"[Debt levels have] the potential to become more relevant/an added tailwind now as the market has just been unfairly complacent about the U.S.' debt path, largely because rates were so low," she said.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.