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Gold market remains bullish after hitting record highs above $2,080, but volatility could increase

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(Kitco News) - A growing consensus in financial markets that the Federal Reserve has finished its tightening cycle will continue to support a sustainable move in gold to new all-time highs, according to some analysts.

While there is solid bullish momentum in the marketplace, analysts are also warning investors that the precious metal could see higher volatility as stubborn inflation could force the Federal Reserve to maintain its elevated monetary policy longer than expected.

The market has already seen a glimpse of gold's potential and volatility as the overnight price action briefly pushed prices to a record high of $2,085.40 an ounce. Meanwhile, initial profit-taking early in the North American session has been met with renewed buying. June gold futures last traded at $2,066.50 an ounce, up 1.45% on the day.

Commodity analysts at TD Securities have said that they are not fading the gold rally as the price has the potential to move higher. They noted that with the market looking for the Fed to cut rates as early as September and through next year, gold is just on the cusp of a new bull market.

"The melt-up in prices overnight associated with ongoing stress in the banking sector revealed that traders are willing to deploy their hoard of dry-powder. After all, our gauge of discretionary trader positioning still suggests this cohort has yet to participate in the rally in gold," the analysts said. "Algorithmic positioning may well be 'max long,' but given the bar for liquidations has notably increased, CTA trend followers are unlikely to keep prices from printing new all-time highs. Further, retail demand for bullion remains resilient amid ongoing bank stress and the latest central bank data still shows little sign of buyer fatigue."

However, some analysts warn that while the central bank has paused, Federal Reserve chair Jerome Powell signaled that the committee is still not ready to pivot and cut interest rates this year.

"We on the committee have a view that inflation is going to come down not so quickly," Powell said in his press conference Wednesday. "It will take some time, and in that world, if that forecast is broadly right, it would not be appropriate to cut rates and we won't cut rates."

Ole Hansen, head of commodity strategy at Saxo Bank, said that Powell's stance is not particularly bullish for gold; however, he added that the market has largely ignored the central bank's stance and is focused on the fact that rates will not be going up.

"While the market awaits data or developments that support or alter the current rate trajectory, the short-term path for gold is likely to remain choppy, especially if inflation concerns return to challenge the mentioned rate cut expectations," he said.

However, Hansen added that he remains long-term bullish on gold. He noted that the current banking crisis, further weakness in the U.S. dollar, solid central bank demand, stubborn inflation, and ongoing geopolitical uncertainty are all factors providing long-term support for gold.

Some analysts have noted that the Federal Reserve's neutral stance on monetary policy will allow investors to focus on other bullish factors for gold, primarily its safe-haven allure as the global banking crisis continues to unfold.

WEF survey shows economists evenly split between U.S. recession and growth, which should support gold prices

"Overall, there was nothing in the FOMC to derail the bullish gold narrative or trend; while some (not all) Fed pause expectations were priced in, this is a greenlight to start probing up at ATHs, given super supportive pre-Fed backdrop and the ability for bull markets to refocus on other potential drivers," said Nicky Shiels head of metals strategy at MKS PAMP, in a note Wednesday.

Ipek Ozkardeskaya, senior analyst at Swissquote, said that gold's rally will depend on the trajectory of bond yields, which along with the Fed's monetary policies, will be impacted by the ongoing banking crisis and lending conditions tighten.

"At the current levels, the upside potential depends mostly on what will happen on the US yields front. There is a strong negative correlation between the US yields and gold's valuation," she said in a note Thursday. "We see that this correlation is even stronger at a time of rising bank stress. Therefore, a potential escalation in bank stress could support gold, but gold needs persistent downside pressure in the US yields to reach and to breach the $2100 resistance."

As to gold's next target after hitting a new all-time high, analysts have said that investors should keep an eye on $2,100 an ounce.

In a nod to May the Fourth, Edward Moya, OANDA senior market analyst, said, "The force is strong for gold."

"The real economy is going to get knocked down a lot given what we are seeing with financials and that will keep demand elevated for safe-havens.  Gold is going to shine given this macro backdrop and possibly eye a move above the $2100 if the de-risking mood on Wall Street remains over the next few sessions," he said.

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.