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Further financial turmoil to push gold price to $2,100, says ANZ

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(Kitco News) Gold's position above $2,000 an ounce will likely become more permanent within the next 12 months, said Australia and New Zealand Banking Group (ANZ) in its latest note. And any worsening in financial conditions could push prices toward $2,100.

The precious metal is in an odd position. The Federal Reserve is still likely to hike rates by another 50 basis points before July, which will weigh on prices in the short term. At the same time, risks around tightening financial conditions and more banking turmoil could boost prices to new record highs.

"Increased recession risk, equity market volatility and simmering geopolitical tensions could stimulate more strategic investment in gold," ANZ said Wednesday. "The turning point for the market could be a pause in U.S. interest rate hikes. While we believe the Federal Reserve is likely to hike another 50bp by June, gold is likely to give up some risk premium in the short term before rising again."

Gold remains in a bull trend as long as it trades above $1,900 an ounce. "We expect the price to find immediate support around USD1,950/oz and, once this is broken, the next trend line support lies at USD1,900/oz," ANZ's commodity strategists Daniel Hynes and Soni Kumari wrote. "Any deterioration in financial turmoil could move the price above the recent high towards USD2,100/oz."

Last week, gold surged to $2,050 an ounce after stronger-than-expected U.S. core CPI numbers. And so far, it has found solid support in any selloff just below the $2,000 level. At the time of writing, June Comex gold futures were trading at $2,017.90, up 0.53% on the day.

ANZ sees the Fed pausing in the second half of this year and potentially looking at rate cuts amid rising recession risks.

"The inversion of the U.S. yield curve has steepened recently, and historically this has been followed by rate cuts, with a lag of three to six months. Such a scenario normally bodes well for higher gold prices," Hynes and Kumari said.

Also, the U.S. dollar outlook, usually a strong gold driver, currently favors the precious metal. "We believe the U.S. economy is underperforming compared to other major economies, leaving more downside for the USD," ANZ added.

On top of that, there is room for gold to go higher on the institutional demand side. "Gold ETF flows turned positive in March and speculative net-long positions are rising. Even so, investor holdings are low, leaving room for accumulation, which could offset any weakness in physical demand caused by higher prices," ANZ pointed out. "Global ETF holdings rose by 32t to 3,444t in March after outflows for ten consecutive months. Even so, global ETF holdings dropped by 28t in Q1 2023."

The bank's year-end gold price forecast is $2,050, with risk skewed to the upside. ANZ noted that the impact of the Fed's aggressive tightening is finally coming to the surface.

"Economic activity is slowing down, with US ISM Manufacturing contracting for the fifth consecutive month, falling to 46.3. Indeed, the Conference Board Leading Indicator is suggesting an eminent recession," ANZ described. "The Fed's hiking trajectory has been guided by U.S. CPI inflation and labour data, which are showing signs of easing."

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