(Kitco News) - With gold prices pushing to within striking distance of $2,300 an ounce, it is the gift that keeps on giving, especially when you’ve been holding it for the last two years.
BCA Research has been bullish on gold since November 2022, as insatiable demand from emerging market central banks has changed the dynamic in the marketplace. Since then, the firm has only become more bullish on gold, according to Robert Ryan, Chief Commodity and Energy Strategist at the Montreal-based research firm.
Last week, BCA increased its gold price target to $2,300 an ounce. While central banks continue to provide solid long-term support for gold, Ryan said that the impending shift in the Federal Reserve’s monetary policy is creating this new bought of bullish momentum.
“Inflationary pressures this year will remain subdued as labor productivity growth – driven by strong capex and R+D spending – continues. This will make the Fed more confident in beginning its policy-rate-cutting cycle in June and will keep gold well bid,” Ryan’s team said in their latest research report.
Although BCA expects a June rate cut, doubt is starting to creep into the marketplace. According to the CME FedWatch Tool, markets see a roughly 58% chance of easing in two months. One month ago, markets saw a nearly 80% chance of a cut.
In its updated forecast, BCA looks for two rate cuts this year as inflation pressures continue to ease.
“With supply chains mostly restored globally, we expect goods inflation to remain well-behaved for the balance of the year. Services inflation, however, likely will remain sticky owing to its higher labor content vs. manufacturing, and the relative insensitivity of services to energy-price effects,” the analysts said in the report. “Rising productivity and immigration will lead to well-behaved inflation and falling interest rates. These will provide a bullish backdrop for gold, and the economy overall.”
Ryan pointed out that in this environment, real rates will remain slightly negative, which makes bonds expensive and should weaken the U.S. dollar, removing two major headwinds for the gold market.
“When we start to see the U.S. dollar weaken that will create another leg up in gold,” he said.
Looking beyond U.S. monetary policy, Ryan said that he expects emerging market demand to continue to support gold’s bull run. He added that investors need to pay attention to Chinese demand as this will remain robust for the foreseeable future.
“In China, gold is the only store of value they have in an economy that's deflating,” he said. “Chinese households really don't have many alternatives now that the property market's melted down.”
At the same time, Ryan expects that central banks will continue to stack gold as U.S. debt continues to grow.
