This is the cause for gold price containment - Liberum
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(Kitco News) There have been many gold-supportive drivers out there, with prices currently trading near 13-month highs. But what's holding up the run to new record highs? Liberum lays out the cause for gold price containment.
Despite markets looking for a rate cut later this year, the number one headwind for gold is a hawkish Federal Reserve. The U.S. central bank's official stance is offsetting other positive drivers, such as inflation shocks, bank failures, recession fears, and the ongoing war in Ukraine.
"Why have gold's multiple bullish demand drivers merely supported the price? It's because they're still being offset by Fed-led inflation-targeting rate hikes," said Liberum analyst Tom Price.
And currently, it is not even the inflation numbers giving Fed hawks power but the employment situation in the U.S.
"On Easter Friday, the U.S. Department of Labor released its March 2023 NFP report: 236k jobs were added (vs. mkt 239k), indicating a stable-to-robust labour market …which probably does not require the U.S. Fed to adjust its now year-old, inflation-targeting monetary policy," Price pointed out.
This report has capped gold's rally just below its record highs. But gold continues to confidently trade above the critical psychological $2,000 an ounce level, with June Comex gold futures last trading at $2,056.80, up $32 on the day.
"This is a frustrating outcome for some gold investors. Why? It's basically an extension of the last 3yrs of trade for gold: sticking to a very tight US$1,800/oz, +/-10% range," Price said in Wednesday's report.
Macro drivers will be key for gold going into May's Federal Reserve monetary policy meeting. But despite markets pricing in a Fed rate cut later this year, Liberum remains bearish on the precious metal.
"We do not forecast a U.S. recession + remain bullish on aggregate demand growth & bearish on gold," he said. "[But] we still encourage prudent investors to keep some gold exposure in their portfolios, through the cycle."
With the view that the Fed will hold rates higher for longer, Liberum's forecast sees gold falling below $1,800 an ounce in 2023-24, with a price floor of above $1,600.
But there are some bullish upside risks to this outlook. At the number one spot is policy mismanagement by the Fed.
"Any surprise moderation in the Fed's cash rate hike cycle, on an unchanged macro-backdrop, may allow gold's bullish price drivers to emerge (e.g. attempt to prematurely normalise growth; conflicting monetary/fiscal policies; currency debasement, etc.)," Price said.
Other upside risks on Liberum's list include more inflationary shocks, geopolitical tensions, and the U.S. dollar weakness.