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Safe-haven demand is 'fleeting,' but gold's response to real yields is not, says Standard Chartered

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(Kitco News) As the gold market sees another volatile session, Standard Chartered says while the safe-haven demand can be "fleeting," the precious metal's response to real yields is not.

"Gold's most recent rally above USD 1,900/oz comes amid heightened financial-market stress, with rising concerns over contagion risk, recession risk and increased volatility," said Standard Chartered precious metals analyst Suki Cooper. "While safe-haven demand can be fleeting, we expect gold prices to respond most strongly to real yields."

After posting its best week in three years and briefly breaching $2,000 an ounce on Monday, April Comex gold futures retreated to $1,942.20 on Tuesday, down $40.60 on the day.

The risk for gold prices is a drop in the near term as investors face liquidity issues amid market volatility. But another test of $2,000 an ounce is "increasingly likely," Cooper said in a note.

With all eyes on the Federal Reserve's monetary policy meeting on Wednesday, Standard Chartered is projecting a 25-basis-point hike, followed by a potential pause in tightening. "Indications that this is the last hike of the current cycle are likely to see gold retest USD 2,000/oz," Cooper said.

The bank also sees growing recession and inflation risks as keeping gold prices elevated.

The fact that gold rallied in the face of significant financial turmoil as the banking sector plunged into crisis mode was in contrast to the previous financial-market stress events, Cooper pointed out.

"We believe two factors have led to prices bucking the trend: (1) Light gold positioning ahead of the collapse, suggesting any change in sentiment would push prices higher quickly, as the market was not overextended and (2) central banks have been active buyers, citing geopolitical risk and heightened market uncertainty as motives for adding to gold reserves in recent years," she wrote.

For gold to see that $2,000 level, the market must see a prolonged safe-haven bid and a shift in monetary policy expectations. Even though the market consensus is to see another 25-basis-point hike, rate cut expectations are starting to grow due to the banking turmoil. And the gold price will defer to the Treasury yields price action for guidance on that front.

"The sharp decline in real yields has already boosted prices, but as the safe-haven bid fades, we believe rate-hiking expectations will remain the key driver. This does not mean gold has escaped downside risk, which could still come amid equity-market volatility and as liquid assets are needed to meet margin calls," Cooper noted.

Standard Chartered's price forecast sees gold at $1,900 an ounce in Q1 and $1,840 in Q2.

On the physical side, analysts are paying close attention to central bank gold buying, which has been at record levels. "The physical market is likely to come under pressure due to high prices, but central bank demand could plug the gap if it stays price-agnostic," Cooper said.

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