Gold's medium-term fundamentals remain bullish even if prices fall below $1,800 - Analysts
(Kitco News) - Gold sentiment is clearly bearish as markets look for the Federal Reserve to maintain an aggressive higher-for-longer monetary policy stance. But analysts are not giving up on the precious metal just yet, with some looking for higher prices by the end of the year.
Gold prices have fallen $140 this month from January's nine-month high above $1,950 an ounce. Gold has struggled to attract consistent upside momentum as short-term bond yields continue to rise, with the yield on U.S. two-year notes hovering around 4.60%, near its highest level since 2007.
The sharp rise in U.S. bond yields has provided new bullish momentum for the greenback, with the U.S. dollar index holding the line around 104 points.
Despite the headwinds, in his latest research note, Ole Hansen, head of commodity strategy at Saxo Bank, said that he is maintaining his medium-term bullish outlook for gold as he believes the Federal Reserve will be unable to win out against the global rise in inflation.
"We still view the medium-term outlook for inflation falling to below 2.5% as being somewhat optimistic, compared with our forecast closer to 4%," Hansen said. "First, however, we will see several months where inflation will continue to decline before rising wage pressures, China's recovery lifting the cost of raw materials will be felt."
Hansen added that in the near term, he expects to see further weakness in gold and is watching the $1.788 area as the next level of major support.
"We are looking for a price friendly 2023 for investment metals supported by recession and stock market valuation risks, an eventual peak in central bank rates combined with the prospect of a weaker dollar as well as continued strong central bank demand," he said.
Along with Hansen, currency analysts at Standard Chartered see gold as potentially oversold even if prices have room to fall to $1,780 an ounce.
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"We would gradually add exposure to Gold (especially those who are underinvested), given that XAU/USD is starting to look oversold. Moreover, central bank demand remains strong and we expect to continue supporting Gold prices," the analysts said in a note Tuesday.
Standard Chartered expects bond yields and the U.S. dollar to consolidate, easing some of the headwinds for gold.
In a comment to Kitco News, Huw Roberts, Head of Analytics at Quant Insight, said that gold's continued selloff has pushed the market into fair value territory according to their economic models.
However, the analyst noted that elevated consumer prices continue to support the precious metal.
"Breaking the Qi model down, global inflation expectations are the joint biggest positive driver. Simply reflecting gold's role as an inflation hedge," Roberts said.