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Gold price to average $2,000 in Q4 as Fed cut rates by 75bps and speculators increase exposure, says ING

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(Kitco News) Gold can average $2,000 an ounce in the fourth quarter of this year as speculators increase their exposure and the Federal Reserve cuts rates, said Dutch bank ING.

After a massive rally over the past three weeks, some pullback in gold is inevitable, said ING's head of commodities strategy Warren Patterson. But there is ample trading room for prices to move higher in the second half of the year.

"Whilst we expect a pullback in prices in the short term, we see gold prices moving higher over 2H23, and expect spot gold to average US$2,000/oz over 4Q23," Patterson said. "The assumptions around this are that we do not see further deterioration in the banking sector and that the Fed starts cutting rates towards the end of this year."

Patterson broke down the speculative positioning in gold to get a glimpse behind the curtain.

"CFTC data shows that speculators have boosted their net long in COMEX gold in recent weeks. The managed money net long has increased by 67,047 lots since late February, to stand at 106,955 lots. Speculators had already increased positioning towards the back end of last year and the start of this year - on the expectation that the Fed is not too far from the peak fed funds rate," he said.

But there is still room for more speculative positions. And the right trigger would be lingering banking sector concerns and a Fed pivot.

There are a few signs that point to speculators increasing their gold exposure, Patterson noted. "The current net long is slightly below levels seen in January this year, well below levels seen at the start of the Russia/Ukraine war, significantly lower than levels seen over the peak Covid lockdown period and below the record net long of around 292k lots seen back in September 2019," he said.

Also, the current net spec long in COMEX gold is about 22% of open interest. In the past, gold has seen spec length at as much as 50% of open interest, Patterson added. And the long/short ratio for speculators in COMEX gold is currently at 3.72, which is well below the record of more than 90 seen at the peak of Covid lockdowns.

In the meantime, the gold-backed ETF trends are reversing after significant outflows last year. In the past two weeks, ETF net buying was at 36 tonnes.

Due to geopolitical uncertainties and the economic climate, central bank gold buying will also remain a driver this year. "Strong buying has continued into 2023, with Turkey and China adding a further 23 tonnes and 15 tonnes, respectively, in January 2023," Patterson said.

ING's base case sees the banking sector crisis contained, the economy slowing, inflation coming down, and the Fed looking satisfied with the current rate hikes.

"Fed policy is likely to be key for gold over the medium term. The Fed is likely approaching a peak in the Fed funds rate, and we could see a pivot over the second half of this year. Recent events suggest that credit flows will become more restrictive - this will weigh on the economy and allow inflation to fall even faster," Patterson said.

The Dutch bank does not rule out another 25-basis-point rate hike in May but sees rate cuts in the second half of the year. "We see the Fed cutting by 75bp in the fourth quarter. We would expect real yields to follow policy rates lower later in the year, which should prove supportive for gold prices," Patterson added.

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