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What's next for gold price if chances of a recession are 'slim,' Metals Focus weighs in

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(Kitco News) The resiliency in the U.S. economy is forcing markets to re-price the monetary policy outlook for the rest of the year. And as gold looks to end the month down $65, Metals Focus analyzed how much lower gold can fall in light of stronger-than-expected economic indicators.

Gold is seeing its worst month since February as markets shift expectations, pricing in a nearly 100% chance of a rate hike in July. After kicking off the month above $1,980 an ounce, August Comex gold futures last traded near 3.5-month lows at $1,916.

"After surging to $2,063 in early May, just short of its all-time peak, the yellow metal is now trading closer to $1,900 as some of these expectations have been re-priced," leading precious metals research consultancy Metals Focus said in its latest report.

Central banks worldwide renewed hawkish rhetoric during the first month of the summer, accelerating their inflation fight due to surprisingly strong economic growth, which remained unaffected by the most aggressive hiking cycle in decades.

The latest macro surprise was the final estimate for the U.S. Q1 GDP data that showed the economy growing at 2%, up from the previous estimate of 1.3%.

"The resilience of the U.S. economy so far this year, combined with still sticky core inflation, has led financial markets to re-evaluate both the prospects for the U.S. economy and rates going forward ahead; this, in turn, has triggered a correction in the gold price," said Metals Focus.

Stubborn inflation and a tight labor market mean interest rates could remain high for longer, and rate cuts are likely off the table for this year. This is a key driver for gold for the rest of this year.

The biggest problem with inflation is in the service sector. Federal Reserve Chair Jerome Powell has been raising alarm that the longer inflation remains elevated, the higher the risk of it getting entrenched. "Don't see us getting back to 2% this year or next year," Powell said Wednesday. "The passage of time is not in our favor."

Powell is projecting two or more rate hikes this year, and the markets are starting to get on board, with the CME FedWatch Tool pricing in a nearly 90% chance of a 25-basis-point rate hike in July.

And the Fed is not alone, with the European Central Bank, the Bank of England, and the Swiss National Bank embracing more rate hikes recently. "This highlights that inflation control will remain a priority over economic growth, and so it is unlikely that the Fed will resort to rate cuts aggressively if a recession is avoided," Metals Focus pointed out.

Given the current macro environment, the chances of an outright recession "remain slim," according to the report. The latest leading indicators supporting this view include a tight U.S. labor market and June's consumer confidence data hitting the highest levels since January 2022.

This could spell trouble for gold in the short term, with prices at risk of falling below the $1,900 an ounce level.

"Similar to the boost gold received when interest rate expectations transitioned from a hawkish to dovish stance, we believe that the adjustment to a reality of no cuts for longer will weigh on gold," Metals Focus said. "This has been already evident in the past two weeks as financial markets have completely ruled out rate cuts in 2023, which has seen gold fall below $1,920."

From a technical perspective, gold can drop to $1,730 an ounce, around 10% down from current levels. However, the annual price average for 2023 will likely be at $1,890, Metals Focus added.

The case for holding gold is still intact, the report noted, pointing to geopolitical risks and strong central bank gold demand as drivers limiting the selloff in gold.

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