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Gold prices have room to fall further, but it's not as bad as it could be - Natixis' Bernard Dahdah

Kitco News

(Kitco News) - The gold market continues to struggle as prices remain below $1,900 an ounce and one international bank is looking for lower prices in the first half of the year as the Federal Reserve continues to raise interest rates to bring inflation down.

In his latest outlook forecast, Bernard Dahdah, precious metals analyst at Natixis, said that despite gold's correction this month, prices have room to fall further as bond yields remain elevated while inflation pressures continue to drop.

However, Dahdah added that he is not as bearish as he should be according to the bank's economic model.

"The model suggests that prices could average $1,586 an ounce in 2023. Nevertheless, we would not get fixated too much on that number given that in the real world, there are more than just a few parameters," he said.

While prices could be significantly lower this year, Dahdah said that investor concerns about a recession and fluid expectations around a potential rate cut in the second half of the year should keep gold prices from falling to a multi-year low.

"As such, in our base case, we see prices in 2023 averaging at $1,790/oz followed by a rise to an average of $1,830/oz in 2024 as the Federal Reserve starts cutting rates."

The comments come as gold prices struggle to attract new investor interest after a solid start to the year. April gold futures last traded at $1,858.40 an ounce, down 0.27% on the day.

Dahdah said that the bank's economists see moderate growth in 2023 even as the U.S. falls into a recession in the second and third quarters of the year. However, he added that the downturn wouldn't be deep enough to force the Federal Reserve to cut interest rates.

"Our model doesn't catch market expectations regarding a potential Fed rate cut. Entering into the second half of the year, we believe that investors' expectation of a rate cut in 2024 will increase - which should be supportive of gold," he said.

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At the start of the year, markets started pricing in rate cuts by the end of the year; however, persistently high inflation is helping to shift market expectations. The CME's FedWatch Tool shows markets pricing in a growing chance that the Fed Funds rate will push above 5%, peaking around 5.50% by the end of the year.

Tuesday, the U.S. Labor Department data shows inflation for the year dropped for the seventh straight month even as it remains well above the Federal Reserve's target of 2%. U.S. CPI increased 6.4% for the year in January, down slightly from December's 6.5% annual rise. However, inflation is down from the June 40-year high of 9.1%.

Along with gold, Dahdah said that he also sees potential for lower silver prices as the two metals remain highly correlated.

"As it currently stands, the three-month rolling correlation between gold and silver is trending at +0.83, indicating a very strong relationship between both metals. For the past two decades, that correlation has averaged +0.81 and only briefly dropping below +0.7 in 2011 and 2015," he said in a separate research note.

"Our view is that prices of both metals are likely to ease over the next months," he added.

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.