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TD Securities sees gold prices driving to $2,100 by the end of 2023

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(Kitco News) - The gold market faces strong headwinds as persistent inflation and robust economic activity support the Federal Reserve's aggressive monetary policies. However, one bank still sees a path for gold to hit record highs by the end of the year.

In his latest gold report, Bart Melek, head of commodity strategy at TD Securities, said that he looks for gold prices to push to $2,100 an ounce, representing a new all-time high, by year-end.

Melek noted that gold has struggled as economic data has surprised to the upside. However, he expects to see a mean reversion in the market as rising interest rates start to bite and activity slows.

"The cyclicity and mean reverting nature of economic data surprises, along with the Fed's restrictive rate policies, should work in tandem to precipitate a downdrift in US economic surprise indices," he said in the report. "If the Fed Fund futures reaction remains constant, dropping on negative data surprises as it rose in response to positive surprises, the resulting lower yield along the forward curve should see gold rally."
TDS' bullish outlook on gold comes as the Federal Reserve has said that it is keeping its options open and its monetary policy decision in September will depend on the incoming data. Markets expect that the central bank will leave interest rates unchanged in two months and see only a 60% chance of one more rate hike this year.

Analysts have said that the Federal Reserve's hawkish bias is keeping a lid on gold prices; at the same time, market uncertainty and the threat of a recession support prices. December gold futures last traded at $1,972 an ounce, down 0.34% on the day.

Melek noted that he doesn't expect it will take much to shift the hawkish bias as the incoming economic data just has to disappoint relative to market expectations. He added that market optimism could be close to peaking.

Gold weighed down by rate uncertainty as banks do the Fed's heavy lifting

"When data is favorable relative to the consensus, as we have seen recently, adaptive behavior tends to adjust market expectations to a higher and higher level. This typically manifests in economic surprise indices, which have jumped to their highest since March 2021 due to a recent run of stronger-than-expected data. But these upward adjustments will usually run their course in 2-3 months, then a peak is reached as traders tend to adjust to the data they see," he said. 
"They also typically overestimate future activity based on past data, and it becomes harder and harder to surprise them. The surprises index will peak and then trend lower as a result eventually."

Melek noted that given how aggressively the Federal Reserve has raised interest rates, economic data should weaken soon, driving bond yields and the U.S. dollar lower.

"When data starts to come in below expectations, over time, markets will likely rapidly adjust to negative surprises. This should drive rates (nominal and real) lower in the forward market, lifting gold," he said.

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