Fed's Uncertainty Casts Shadow, But Gold's Bright Future Shines

Investors should expect to see higher volatility in the gold market as the precious metal continues to defy expectations but looks increasingly vulnerable in the near term, according to one market analyst.

In a recent interview with Kitco News, Tim Hayes, Chief Global Investment Strategist at Ned Davis Research, said that he expects gold prices to eventually surpass last month's record highs above $2,448 an ounce, but the breakout might not happen until the Federal Reserve actually pulls the trigger on rate cuts.

Hayes' qualified bullish outlook comes as the precious metal has been unable to hold last week's gains and drops below support at $2,350 an ounce. June gold futures last traded at $2,343.50 an ounce, down more than 1% on the day.

While the gold market still remains in a solid uptrend, the precious metal is once again being driven by uncertainty surrounding the Federal Reserve's monetary policy. At the start of the year, markets were pricing in six potential rate cuts this year; those expectations have dropped to two as inflation remains stubbornly elevated.

Gold could be particularly vulnerable this week as markets focus on Wednesday's Consumer Price Index report. Hotter-than-expected inflation could force markets to move more rate cuts off the table.

Hayes said that the Federal Reserve's continued fight against inflation could prove to be challenging for gold in the near term; however, he added that investors need to look at the broader financial landscape.

Although inflation remains elevated, growing slack in the labor market and weaker economic activity will keep the Federal Reserve from raising interest rates, he said.

"The trend still is one toward easing policies in front of us, and that hasn't changed," Hayes said. "The background here is still favorable for gold. I wouldn't be surprised if it gets going again once we get more confirmation that actually bond yields are trending lower, that we're going to have accommodative monetary policies."

Along with gold's improving opportunity costs, Hayes said that another important factor that supports higher gold prices this year is investment sentiment. He added that the gold market is seeing nowhere near the same type of mania that marked previous peaks.

Analysts have noted that gold's double-digit rally this year has been driven by central bank demand and robust investor interest, primarily in Asian markets. However, Western investors have largely ignored the precious metal and have sold their positions in gold-backed exchange-traded funds.

"We're not seeing the retail fascination with gold that would sort of create a bubble," he said.

While Costco's $100-$200 million a month in gold sales have sparked some concerns of froth in the market, Hayes said that the market is still very limited. He added that when your taxi driver starts talking about gold, the market has reached a mania stage.

Although Hayes is bullish on gold through year-end, he said that he doesn't expect the same explosive move seen at the start of the year. He added that the shift in interest rates has tempered the speculative interest in the precious metal.

Hayes said that he sees gold prices consolidating in an upward trend as investors buy price dips.

"We hit record highs without retail participation," he said. "So what happens when investors do jump into the market?"

This article originally appeared on Kitco News