(Kitco News) - The gold market is struggling to hold support at $2,000 an ounce, trading near a two-month low; however, one analyst said that the gold market can still see significantly higher prices this year as the Federal Reserve is forced to cut rates even as it fails to get inflation under control.
Gold prices have seen significant selling pressure this week after the U.S. Consumer Price Index showed annual core inflation rising 3.9% last month. While inflation pressures continue to ease, consumer prices were hotter than expected as economists looked for a rise of 3.7%.
Persistently stubborn inflation is forcing markets to push back their expectation for aggressive monetary policy easing from the Federal Reserve. Markets have nearly completely priced out a March rate cut, and now see only a 35% chance of a move in May.
At the same time, a fairly robust labor market is supporting economic activity, reducing fears of an impending recession.
However, Chantelle Schieven, head of research at Capitalight Research, said that despite the optimism, the U.S. has not avoided a recession, and the longer the Federal Reserve maintains its chokehold on the economy, the greater the threat grows.
Schieven said it’s only a matter of time before the Federal Reserve abandons its inflation target and cuts rates to support the economy. This shift in monetary policy will drive renewed investment demand in gold, pushing prices significantly higher, she added.
As momentum picks up, Schieven looks for gold to hit a peak of $2,400 an ounce this year with an average price of $2,170 an ounce. Schieven was the most bullish gold analyst in the London Bullion Market’s 2024 price outlook survey.
“When you look around and see everything that is happening in the global economy, you see all the risks in the market and geopolitical uncertainty; our forecast doesn’t seem overly bullish,” she said. “There is enough uncertainty and risk in the economy for investors to build a strong defensive position in their portfolios.”
Schieven explained that given the underlying weakness in the broader marketplace, it wouldn’t take a significant spark of uncertainty to drive investors back to gold. She added that momentum in the gold market can drive prices significantly higher.
Schieven noted that despite solid economic headlines in 2023, gold still managed to achieve a record high. She pointed out that central bank demand continues to provide robust support for the precious metal, and added that she expects this trend to continue for the foreseeable future.
“The globalization trend continues to weaken as the divide between the East and West widens. This is forcing central banks to diversify out of the U.S. dollar and into gold,” she said. “We have not seen a peak in central bank demand. If China wants to compete with the West, a 4% holding in gold just isn’t enough.”
Economic risks to drive investment demand
While central bank demand will continue to support gold, Schieven said that she expects renewed investment demand to ignite her expected rally.
Although economic activity has been stronger than expected, Schieven said she still sees the potential for a recession later this year.
She noted that credit card debt at record highs is one of the biggest risks for the economy right now. She said job losses could trigger significant defaults, adding to the commercial real estate-driven credit crisis.
“We have seen this before; when the economy starts to break down, it can fall into a recession fairly quickly,” she said. “The record level of debt that has been building over the years means we could also see another major credit event.”
With the debt-induced sword of Damocles hanging over the economy, especially in an election year, Schieven said that the Fed will be quick to ease interest rates as the economy starts to weaken.
Schieven added that it’s unlikely the central bank will be able to get inflation to its 2% target before it is forced to cut interest rates, which means real rates will be much lower, providing some incentive for the gold market.
“When you look at the nature of the economy, the way things are changing and demographics are shifting, it’s unlikely we are going to see inflation sustainably around 2%,” she said. “New domestic supply chains and demand for critical commodities as part of the green energy transition are only two factors that will likely keep inflation above 2% for the next five years.”
Schieven added that she doesn’t see inflation going back to the 2022 peak; however, she said that it could continue to hover between 4%, 3%, or 2.5%.
She said that she sees inflation persistently high enough to force the Federal Reserve to adjust its inflation target, which would be a game-changer for investment demand in gold.
“The Fed has been fairly clear that it won’t adjust its target, but we have seen them massage this target before,” she said. “We have seen it many times before, the Fed holds its stance until it doesn’t.”
