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Commerzbank lowers mid-year gold price forecast to $1,800 due to shifting interest rate expectations

Kitco News

(Kitco News) - Hawkish comments from U.S. central bank officials and persistently high inflation is taking their toll on the gold market and one international bank sees potential for lower prices in the first half of the year.

In their latest research note published Friday, commodity analysts at Commerzbank said that they are lowering their mid-year gold prices forecast to $1,800 an ounce, down from the previous estimate of $1,850, as growing interest rate expectations continue to weigh on the precious metal.

The comments come as gold prices look to end the week with substantial losses as prices fall further below $1,850 an ounce. April gold futures last traded at $1,848.40 an ounce, down 0.18% on the day more than 1% on the week.

"Hopes of an end to the rate hike cycle in the near future in the US have turned out to be premature. The correction of the gold price has been correspondingly pronounced: currently, a troy ounce of gold costs a good $130 less than it did at the beginning of the month. Presumably, a number of investors have had their fingers burnt. Market participants are, therefore, likely to proceed with caution…" the analysts said.

The most significant influence on Commerzbank's near-term bearish outlook for gold is the rise in bond yields, as some members of the Federal Reserve have said the central bank might have to continue aggressively raising interest rates to cool down inflation.

Thursday, U.S. Producer Price Index cooled but at a slower pace last month, coming in at 6% on an annual basis versus the expected 5.4%. Meanwhile, Tuesday, the Consumer Price Index (CPI) increased 6.4% for the year in January, beating expectations for a 6.2% rise.

The hawkish comments and hot inflation data have pushed the yield on 10-year bonds to a four-month high of 3.9%. Markets are starting to price in a potential 50-basis point hike from the Federal Reserve next month.

Because of shifting market expectations, Commerzbank now sees the U.S. Fed Funds rate peaking at 5.5%.

Shifting interest rate expectations has also pushed the U.S. dollar high, creating another headwind for gold. While off its highs, the U.S. dollar index is currently trading above 104 points, its highest level since late-December.

Although the German bank sees lower gold prices in the near term, the analysts remain optimistic that growing recession fears will ultimately support gold prices by the end of the year.

Gold prices to push back above $1,900; its only a matter of time before a recession hits - Haywood Securities

"A lasting recovery should ensue in the second half of the year, however, as the US economy is then likely to experience a dip that will probably spark renewed expectations of rate cuts. We are therefore sticking with our year-end forecast of $1,950," the analysts said.

Along with weaker investment demand weighing on gold, due to rising interest rates, Commerzbank said that they are also looking for weaker physical demand, particularly out of India, a major gold-consumer nation.

The analysts noted that India imported only 11 tonnes of gold in January, a drop of 76% compared to last year's imports.

"There are two main reasons for the pronounced decline: for one thing, local gold prices had climbed to a record level in January, which is likely to have deterred Indian buyers, who tend to be highly price-sensitive. And for another, imports are likely to have been postponed because the Indian government had been expected to lower the import tax. This did not, in fact, happen, however," the analysts said.

Commerzbank added that it will be important to see if demand recovers in February.

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