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The Fed is stuck between economic meltdown and runaway inflation; gold price outlook remains supportive - BCA Research

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(Kitco News) - Even if gold isn't ready to break above $2,000 an ounce, it will remain well supported at current levels as the Federal Reserve's ongoing policy mistake will drive inflation higher, according to one research firm.

In a report published late Wednesday, commodity analysts at BCA Research reaffirmed their bullish outlook for gold through 2023. The firm had held a long gold position since November when prices were trading around $1,750 an ounce. Meanwhile, April gold futures last traded at $1,988.5 an ounce, down 0.37% on the day.

The analysts at the Montreal-based firm said that gold could see some profit-taking as the central bank instills some renewed faith in the banking system after it raised interest rates by 25 basis points.

Despite the recent collapse of U.S. regional institutions Silicon Valley Bank and Signature Bank, and the failure of Swiss-based Credit Suisse, one of Europe's largest banks, the Federal Reserve said that the banking sector remains "strong and resilient."

Although the Federal Reserve has maintained its aggressive monetary policy tightening, it has unleashed a tidal wave of liquidity into financial markets to provide banks with enough operating capital. Although fears have eased this past week, BCA said that the U.S. central bank continues to face some major issues.

"The FOMC decision to raise interest rates should help convince markets of the US economy's health. However, the Fed is still stuck between risking an economic meltdown as a result of aggressive rate hikes, or runaway inflation due to inaction," the analysts said. "Gold prices will remain supported amidst heightened US economic policy uncertainty and the risk of elevated headline inflation."

Along with gold, the firm remains bullish on broad commodities as the Federal Reserve's monetary policy remains a mistake and does not address the underlying issues driving inflation.

Banking uncertainty spurs gold gains, will trade around $2,000 through 2023 - State Street's George Milling Stanley

The analysts said they expect economic policy uncertainty will remain elevated as the Federal Reserve remains in a risk-management mode until the banking crisis is resolved.

Meanwhile, inflation will remain a problem, they added.

"The persistence of headline inflationary pressures, however, and the role of tight commodity markets keeping overall inflation elevated are not being addressed by current central bank policies," the analysts said. "Investors are counting on persistent supply deficits in commodity markets somehow being attended to, just because central banks are increasing borrowing costs and inducing lower incomes to increase slack in the economy. For this reason, core inflation will remain biased to the upside, as higher wage demands persist to cover cost-of-living expenses."

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