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(Kitco News) - The gold market continues to show investors its potential as prices this week tested record highs above $2,080 an ounce; however, while there is a lot of long-term bullish sentiment in the marketplace, the conditions to spark a sustained rally aren't in place just yet.
Gold's push to $2,085 came after the Federal Reserve raised interest rates by 25 basis points and shifted to a more neutral monetary policy. However, in their exuberance, investors have stopped listening to what Fed Chair Jerome Powell is actually saying.
Yes, the central bank looks like it won't be raising interest rates again; however, they are in no position to cut rates anytime soon.
"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."
Despite this consistent message from Powell, markets started to price in a possible rate cut as early as July. That is, of course, until they were hit with a hard dose of reality. Friday, the Bureau of Labor Statistics said that the U.S. economy created 253,000 jobs last month, significantly beating expectations of 180,000 jobs.
At the same time, the unemployment rate dropped to 3.4% and wage inflation increased 5%. Analysts have been very clear: there is no way the central bank can pivot and cut rates in this environment. Gold prices got smacked down pretty hard as market expectations regarding interest rates continue to shift; at one point, Friday prices were down more than 2% on the day, testing support at $2,007 an ounce.
At the same time, while gold prices are down, they are certainly not out. Many market analysts have said that in an environment with unprecedented uncertainty, dips in the gold market need to be bought.
In an interview with Kitco News, George Milling-Stanley, chief gold strategist at State Street Global Advisors, said that investors have not seen the peak in gold as prices will be driven by safe-haven demand.
One major risk creating a lot of anxiety in the marketplace is the ongoing banking crisis with the collapse of First Republic Bank. This crisis is just getting started. Greg Foss, Bitcoin Strategist and Executive Director at Validus Power Corp. said, in an interview with Kitco News chief Michelle Makori, that $10 trillion in equity could be wiped out as more banks fail.
Another reason many analysts remain bullish on gold, despite the recent setback, is because there is still a significant amount of untapped potential. Gold prices have held relatively steady above $2,000 an ounce as investors have just started participating in the rally.
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| Gold hasn't peaked yet, says SSGA's George Milling-Stanley |
The decline was led by investment demand, which fell 51% to 273.7 tonnes. Investors only started jumping into gold-backed exchange-traded funds in early March when the banking crisis began. Those inflows weren't enough to offset the outflows seen in January and February.
In total, the ETF market saw outflows of a trivial 29 tonnes; however, the was a dramatic drop compared to the 270 tonnes of inflows reported during the first quarter of 2022.
In the current environment Juan Carlos Artigas, Head of Research for the WGC, said that he sees solid growth potential for investment demand.
“As the Fed continues to tighten the screws, it is creating pressures on other parts of the financial system, as we have started to see. This could potentially unravel relatively quickly, so now is the time when you want to make sure you include some hedges in your portfolio," he said. "There is a clear rationale for holding some gold now."
