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Gold is going to $2,100 even as the Fed raises interest rates - Lombard Odier

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(Kitco News) - Stubborn inflation pressures could keep the Federal Reserve raising interest rates through the summer but shouldn't stop gold from reaching new all-time highs, according to one private Swiss bank.

In his latest gold outlook St├ęphane Monier, chief investment officer at Lombard Odier, said that he is raising his year-end price target to $2,100 an ounce, up from his previous target of $1,940. Despite rising interest rates, Monier said that growing economic uncertainty should continue to support gold as a safe-haven asset through 2023.

"Persistent price pressures and slowing economies worldwide have taken gold prices, adjusted for inflation, to levels in line with past periods of market stress in the early 1980s, the European sovereign debt crisis, and Covid," said Monier in the report. "Looking ahead, the risk of recession, combined with an eventual peak in real interest rates, plus a weakening US dollar, should all continue to support demand for gold, and the potential for the metal to trade higher over the rest of the year."

Lombard Odier's bullish outlook on gold comes as the precious metal consolidates around $2,000 an ounce. June gold futures last traded at $1,997.90 an ounce, up 0.10% on the day. Gold has struggled to hold consistent gains as markets get comfortable with the idea that the Federal Reserve will raise interest rates by 25 basis points next month.

Markets are also starting to push back the timing of a potential rate cut to after summer. In his report Monier said that although headline inflation has dropped sharply from last year's peak, core inflation, which strips out volatile food and energy prices, has remained consistently elevated.

World Bank sees gold prices outperforming broader commodity sector as economic growth weighs on demand

"That means there is still little reason for the Fed to pause its tightening for now, and we expect another rate rise of 25 basis points at its May meeting, and perhaps an additional hike of the same magnitude in June or July," he said. "Our expectation is that U.S. interest rates will peak at around 5.5% with Consumer Price Index (CPI) around 3% at the end of 2023, and that we will not see the Fed cut rates before early 2024."

Monier said that in the current environment, gold could be a little overextended in the near-term; however, he also noted that despite the recent price action, it remains an important portfolio diversifier. He added that in a volatile market, he is trading in gold through options markets.

"At this stage in the market's cycle, we use short July 2023 put options on gold with a strike of around USD 1,900 for 3% of the portfolios' notional amount, to give us the ability to increase our portfolio exposures as and when the price of the precious metal weakens."

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