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Gold's price floor to be tested - Standard Chartered

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(Kitco News) With February's drop of 6%, the gold market will be testing its price floor shortly, according to the latest note by Standard Chartered.

The downward momentum has been driven by a higher-for-longer rate hike outlook, cemented by fear of sticky inflation.

"Gold prices continue to trend lower and have closed in on oversold territory. Macro headwinds have continued to build and one of the three pillars that drove the rally at the start of the year has weakened," said Standard Chartered precious metals analyst Suki Cooper. "The shift in tactical interest had become supportive as the market started pricing in peak rates and USD weakness prematurely, but as rate hiking expectations have risen, open interest data implies that positioning has been scaled back."

The two key drivers that gold needs to halt its selloff are robust physical demand and continued interest in the precious metal from central banks.

"The floor for the market will likely be tested, as well as the second two pillars: first China's demand and second and most importantly, official-sector demand," Cooper pointed out.

Gold's next support level is $1,788 an ounce. "We still think most of the upside risk will materialise in H1, with gold facing downside risk in H2-2023," she noted.

Gold went from trading above $1,940 an ounce at the beginning of February to $1,825 an ounce, which is where April futures were last at on Monday.

One concern is that China's official sector demand could be slowing. China added 15 tonnes to its central bank reserves in January, less than the 62 tonnes reported in November and December.

"Official-sector buying was one of the main pillars of strength for the gold market in 2022, but the bulk of the flow was unreported. Slower reported buying from China may weigh further on sentiment," Cooper wrote.

China's net gold imports via Hong Kong also fell 47% to 23 tonnes in January, according to Hong Kong Census and Statistics Department data.

In the meantime, India's physical demand is weakening. India's gold imports plummeted 76% to 11 tonnes in January from a year ago due to rising local prices and a higher import fee.

"It is not unusual for imports to start the year on a weaker note due to the dip in seasonal demand, but the January 2023 imports are the weakest since 2003 when imports fell to 10t. Local prices in India have started to ease from record highs set at the start of February. However, they are still elevated, at over INR 56,000/10g, which has historically been a hurdle to consumer appetite," Cooper said.

On top of that, ETF outflows have continued to weigh on the gold market, especially with the European investor leading the way.

"Outflows have reached 20t so far in February, with 11t materialising in the last four sessions," Cooper noted. "On a regional basis, holdings have stabilised in North America, but Europe continues to lead net redemptions. The macro environment appears not to support more stable holdings just yet."

From the macro perspective, Standard Chartered projects two more 25-basis-point rate hikes in March and May. It also forecasts one 25-bps rate cut in the second half of this year.

"We expect the Fed … to reach a peak of 5.25%; we forecast one 25bps rate cut in H2 and three cuts in 2024 as the economy slows and inflation recedes. Our long-term fed funds target rate forecast is c.3.25%. The Fed minutes leaned more hawkish, with a few officials supporting a 50bps hike," Cooper outlined.

The U.S. dollar outlook remains unchanged, with the firm projecting more greenback weakness as economic activity starts to slow in the U.S. and the Fed pauses its tightening cycle later this year.

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