(Kitco News) - Although gold has recovered from its nearly 8% overnight drop, the precious metal could face further downside risks as central banks, after being significant buyers, have been forced to sell their gold, according to one market analyst.
In a note on Friday, Bernard Dahdah, Precious Metals Analyst at Natixis, warned investors that gold prices could drop to $4,000 an ounce due to rising global economic uncertainty and inflation fears.
In an updated comment on Monday, Dahdah said that, along with last week’s warning, gold’s selloff shows that central bank selling has become more than just a rumour. He added that a potential hawkish shift in global monetary policies because of higher inflation, while negative for gold, does not completely justify the sharp drop.
“We are less inclined to point to the inflationary concern/central bank pivot narrative as being the dominant driver. If that were the case, then we would have seen the DXY and U.S. 10-year yield make substantial moves at the same time. Neither has really moved this morning,” he said. “Our take behind this morning’s drop is that it is likely that some central banks are selling gold to defend their currency and/or to fund energy purchases. With gold prices dropping sharply late last week and U.S. 10-year yields rising sharply over the past two trading sessions, it could be that this morning we are also seeing bigger sales than usual from physically backed ETFs.”
Dahdah added that the two main drivers behind gold’s unprecedented rally last year have flipped.
“If our previous analysis proves to be right, then gold prices could come under downward pressure for the foreseeable future,” he said.
However, while Dahdah doesn’t rule out another drop below $4,100 an ounce, he also sees lower prices as a long-term buying opportunity.
“We do not think the long-term trend for gold is at the lower end of $4,000/oz,” he said in the note Friday. “If the damage to energy infrastructure is limited and oil prices can quickly drop back to pre-war levels, then we could see central banks have a stronger appetite for gold purchases. This, in turn, could put gold back on its trajectory of enduring levels above $5,000/oz.”
