It seems that the precious metal is about to reverse the bearish trend that dominated it during the past few days, after it fell below the $2,000 level an ounce. Some signs are that the market sell-off is about to end, and prices will head to all-time highs after that.
After testing record highs about two weeks ago, the price of gold has fallen, with June gold futures trading near $1,960 during these moments of the day’s trading. This is about $125 less since testing these record highs of $2085 on May 4th.
Evidence – which will be mentioned later – is that gold still has some investment trade flows that should push prices higher.
We expect discretionary capital to flow towards gold given the strong historical correlations with market expectations for a deepening Fed retrenchment cycle over the next year. Where gold prices may be close to an all-time high then.
Gold is expected to test its new peak at $2150, which it could reach by the end of the year.
Over the past few days, gold has suffered from a widening gap between market expectations and what the Federal Reserve is indicating on interest rates.
However, there is strong support around $1950. Gold’s way is still clear for a jump towards $2,150, but that won’t continue until the latter part of the year when it becomes certain that the Fed will cut.
Gold baffles the markets now.. between expectations of moving to record levels, and expectations of a halt in the rise in a changing macroeconomic environment.
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What drives prices?
Demand for ETFs is one of the main reasons behind rising prices.
Some experts expected gold ETF flows to turn positive for the rest of this year.
Besides, the problems of the US banking sector, high interest rates and uncertainty about the debt ceiling weaken the economic outlook and enhance the safe demand for gold.
This may prompt investors to increase strategic allocations to gold to diversify risks. Gold ETF holdings have seen net increases of 56t since the Silicon Valley crisis.
The dollar is getting weaker
Another aspect of this trend is the depreciation of the US dollar, which perfectly matches the expectations of higher gold prices. The American lost 20% in nominal terms, while gold rose 51 times.
The US dollar has been on a downtrend since it peaked in September 2022, and slowing economic growth and debt ceiling concerns could lead to an additional loss of confidence in the US dollar.
The depreciation of the US dollar is another factor motivating central banks to diversify their reserves. As gold usually maintains its value, while currencies lost their purchasing power due to quantitative easing, as they increased the money supply by printing money.
The trend of de-dollarization is also part of the narrative, with emerging market currencies playing a larger role in international payments. China has begun settling deals with Russia using Chinese, while the UAE and India are in talks to settle energy trade in Indian currency. As this evolving multi-currency system is expected to witness a gradual shift in foreign reserve portfolios, gold is likely to play an important role as this develops.
Recession and debt ceiling crisis
Another big unknown is the US debt ceiling crisis, with the June 1 deadline approaching just over two weeks away. During the 2011 debt ceiling negotiations, the United States saw its credit rating drop, which led to a lower US dollar and a higher . In 2011, ETF inflows totaled 161 tons until the debt ceiling was raised in August 2011.
Moreover, the US economy is slowing down, with many analysts predicting a recession in the second half of the year. In addition, tensions between the US and China and central bank gold buying enhance the safe-haven appeal of gold.
2023-05-19 13:55:00
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