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(Kitco News) - The gold market is holding support at $2,000 an ounce as volatile market expectations once again shift toward the Federal Reserve raising interest rates at least one more time next month.
However, according to one market analyst, any drop below this critical physiological level should be considered a strategic buying opportunity. In an interview with Kitco News, Nitesh Shah, head of commodity research at WisdomTrees, said that gold appears to be well supported at around $1,900 an ounce as financial markets will remain destabilized through 2023.
The bullish outlook comes as gold starts the week on the back foot, as technical selling pressures push prices down 1% Monday; June gold futures last traded at $2,003.70 an ounce.
Although tensions in the global credit market have eased since the collapse of two major regional banks in the U.S. and Credit Suisse, one of the largest banks in Europe, Shah said that the biggest banking crisis since the 2008 Great Financial Crisis is far from over.
After more than a decade of loose monetary policies and cheap liquidity, financial markets are in no position to handle the Federal Reserve's aggressive tightening cycle, he said. Shah added that while investors don't know which bank or market will fail next, the distortion created by the rapid shift to quantitative tightening from quantitative easing significantly increases the risks of further problems in financial markets.
In this environment, Shah said that gold is an important strategic risk asset and should be considered an essential "insurance" policy for investors.
"Sub-$2000, it definitely is worth putting some gold in your portfolio while you wait for some of these risks to materialize," he said. "Gold below $2,000 looks cheaper as financial market risks increase."
While gold will remain an attractive risk asset, Shah warned that the precious metal will be volatile as the Federal Reserve navigates its monetary policy through the boiling sea of uncertainty.
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The Federal Reserve is expecting that as it ends its tightening cycle, it will be able to hold interest rates steady at an elevated level through most of 2023. However, Shah said that central banks don't have an excellent track record of maintaining a pause for long periods.
"History seems to indicate that the Fed basically hikes all the way into a crisis. It goes too far on the way up and then has to cut," he said. "Now, there is a sharpened focus on the fragility of the financial system."
Shah's call for a sharp pivot in U.S. monetary policy also aligns with growing market expectations. According to the CME FedWatch Tool, markets are starting to get comfortable with the Federal Reserve raising interest rates one last time next month. However, markets also see rate cuts coming before year-end.
Although the Federal Reserve is expected to end its most aggressive tightening cycle in more than 40 years, Shah said it is unlikely the central bank will get inflation back to its 2% target. He added that structural shifts in the global economy could keep inflation elevated for the foreseeable future.
Shah noted that this environment will continue to provide long-term support for gold. He pointed out that elevated inflation will keep real yields down, which will also weigh on the U.S. dollar, removing a problematic headwind in the precious metals market.
