(Kitco News) - The gold market could see limited upside potential through the rest of 2024 as there is little to justify its recent record highs above $2,220 an ounce, according to commodity analysts at Commerzbank.
In her latest research report, Thu Lan Nguyen, head of commodity research at the German bank, said that she is skeptical that gold can run much further after rallying more than 9% in March.
However, she is also not expecting to see much downside for the precious metal as she modestly increases her year-end price target.
“Further upside potential is likely to be limited in the medium to long term. This is because a pronounced cycle of interest rate cuts in the US is unlikely, given the persistent risks of inflation. We have recently, therefore, ‘only’ raised our gold price forecast for the end of this year and the end of next year from USD 2,100 to USD 2,200 per troy ounce,” she wrote in her note.
The comments come as the gold market continues to consolidate its recent gains and hold well above initial support at $2,150 an ounce. April gold futures last traded at $2,192.20 an ounce.
Gold rallied to its new record high last week after the Federal Reserve signaled that it is still on track to cut interest rates three times this year. The central bank is looking to ease interest rates even as inflation pressures remain above its 2% target.
While this environment is positive for the precious metal, Nguyen said it doesn’t entirely justify the recent price action.
Although Fed expectations haven’t shifted since December, market expectations have. At the start of the year, markets were pricing in the potential for six rate cuts this year. Expectations have been pared back as inflation pressures have remained stubbornly elevated.
“Some market participants had apparently expected that fewer interest rate cuts would be signaled for this year as well, which is why gold actually rose after the meeting,” said Nguyen.
At the same time, the gold market has seen unprecedented demand from central banks, led by China. Nguyen said that while this supports the price, it also doesn’t justify the rally.
“After all, the PBoC's purchases of nearly 400 thousand ounces in February amounted to just 5% of the central bank's total purchases in 2023. Moreover, global gold trading is extremely liquid. According to the World Gold Council, the daily trading volume in the gold market is around USD 130 billion, which means that even purchases by a few large institutional investors or central banks are unlikely to move the price,” she said.
Nguyen added that the gold market could be sensitive to some profit-taking if economic data comes in stronger than expected and markets are forced to push back expectations of a June rate cut.
“Due to the lack of a convincing explanation for the rise in the value of gold, we are sceptical that the precious metal will be able to maintain its gains in the short term, let alone extend them further,” she said.
This week’s main risk event comes on Friday with the release of the U.S. core Personal Consumption Expenditures Index, the Federal Reserve’s preferred measure of inflation. Markets are looking for inflation to rise 0.3% in February.
However, market reaction to the inflation data will be limited as North American markets will be closed for Good Friday.
