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Gold price at risk of falling to $1,700 unless Fed cuts rates - Metals Focus

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(Kitco News) Gold is unlikely to hold the $2,000 an ounce level in the long term unless the Federal Reserve communicates a clear pivot in its messaging, said Philip Newman, managing director at Metals Focus.

The gold space surged after the banking turmoil, and prices continue to trade well above $2,000 an ounce. But that trend will not last into the second half of the year, Newman told Kitco News.

"Gold above $2,000 is driven by how the market views the Federal Reserve's interest rate policy. Also, with the Silicon Valley Bank and then the uncertainty in Europe, with Credit Swiss, we saw a jump in safe-haven buying by retail and institutional investors," Newman said.

With the market pricing in rate cuts later this year, gold benefits from the dollar-negative connotations and the reduced opportunity cost of holding the precious metal. "Right now, we see more investors going long in gold and some short covering. Those together pushed gold above $2,000," Newman described.

The gold market remains very sensitive to data releases out of the U.S. And the next few readings are likely to counter market expectations that the Fed is ready to start lowering rates. In this scenario, gold can quickly drop.

"We are skeptical that gold holds at this level for some time. The Fed hasn't said it was ready to start cutting rates. Right now, we've got a disparity between what the market is expecting and what the Fed is actually saying," Newman said. "Going into the second half of the year, the market will move more towards the Fed's position."

This is why Newman believes that gold won't be trading above $2,000 an ounce for much longer. "We see the Fed raising rates again and then holding rates high for long enough that we witness heavy liquidations emerge in the gold market, sending the price lower," he said.

With June Comex gold futures last trading at $2,020.60, up 0.84% on the day, Newman's scenario will take some time to play out.

"The Fed is exceptionally mindful of bringing inflation under control. They do not want to see inflation expectations becoming cemented," he noted. "It's easy to say gold that gold will hold at these levels. But we have to take a step back. We see more reasons that gold will weaken than hold this level."

Once the selloff kicks off, gold's price floor could end up being down at $1,700s. But if gold can hold above $1,900 for longer, it could limit the selling. "That may mean that the gold price falls less. But we still think the price will weaken considerably," Newman added. "Could you see it falling into the $1,700s? That is possible."

The main drivers weighing on gold in the second part of the year will be weaker central bank gold demand and the market realizing that the Fed remains hawkish, which is more dollar-positive. "These factors combined drive gold prices lower, perhaps to $1,700s," Newman said.

In the short term, there is enough momentum to push gold to new record highs. But for that to happen, the Fed must signal a shift.

"You would need to see comments by the Fed that suggest they're reassessing the situation. You'll need something perhaps stronger than just the data releases," Newman pointed out. "At the same time, when we get to these new levels, you'll see selling into that."

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.