(Kitco News) - Better-than-expected economic data and persistently high inflation are prompting markets to shift their U.S. interest rate expectations again, with the idea of a higher for longer Fed Funds rate back on the table.
According to the latest research from senior commodity strategist at TD Securities Daniel Ghali, this environment could continue to weigh on the precious metals sector.
"Thus far, the uptrend formed in precious metals prices is inconsistent with the slew of resilient jobs data which have raised the risk that the Fed will not be in a position to cut rates in 2023. This scenario would likely see gold markets return to a downtrend, leading to a consolidation below our estimate of the critical threshold for a sustained change in trend near $1750/oz," Ghali said in his research note.
TDS' bearish outlook on gold comes as prices trade in neutral territory around $1,850 an ounce. April gold futures last traded at $1,851.70 an ounce, up 0.34% the day. Ghali's downside target represents a drop of nearly 5% from current prices.
While Ghali sees lower prices for gold, he said that silver might be the best way to play the downtrend in precious metals. He added that a break below $20.80 would confirm a renewed downtrend.
"Hedging this risk appears more attractive in silver, given this expression bypasses central bank purchases and given industrial demand is likely to continue deteriorating along with global growth," he said.
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March silver futures last traded at $21.73 an ounce, up 0.7% on the day.
Many analysts have noted that gold and silver are struggling as bond yields have seen a solid push higher this month. The yield on 10-year bond yields is currently at 3.84%, a two-month high.
Looking at interest rate expectations, the CME FedWatch Tool shows markets are starting to see the Fed Funds move past 5% in the first half of the year and are starting to price out any potential rate cut at the end of the year.
