In its latest commodity outlook, the French bank noted that even with elevated bond yields, the bond market presents less of a risk for gold going forward. The analysts highlighted some critical factors impacting gold prices, which could push the market to all-time highs in the new year.
Although gold prices have struggled to maintain consistent gains above $2,000 an ounce, the market has remained relatively resilient in the face of elevated bond yields. Analysts at SocGen said that although bond yields are higher, the market is seeing significant volatility, limiting its effect on gold.
"When treasuries experience the level of volatility that they are experiencing today, the value of future cash flows attached to a coupon strip over a non-interest-bearing asset like gold diminishes," the analysts said.
While lower bond market volatility could create some selling pressure for gold, SocGen noted another factor that could limit the precious metal's downside: a peak in U.S. monetary policy.
There are growing market expectations that the Federal Reserve is done raising interest rates as inflation pressures start to weaken and the economy cools. According to the CME FedWatch Tool, markets expect the Federal Reserve to leave interest rates unchanged in December and are pricing in rate cuts in May.
"With Fed hikes likely cresting, it is worth noting that the peak in US rates is higher and likely earlier than in other OECD economies. In other words, US rates can come off more and sooner than rates in other OECD economies, signaling possible dollar weakness ahead, creating a tailwind for gold," the analysts said.
At the same time, the growing threat of a recession could force the Fed to cut rates before it gets inflation under control, providing more fuel to gold's rally.
Another critical factor supporting gold is insatiable demand from central banks. The analysts noted that central bank demand as of the end of the third quarter represents 7.9% of global supply. They added that they don't expect the purchasing trend to end anytime soon.
"Overall, we expect continued central bank gold purchases in an attempt to diversify their reserve base to remain a long-term supporting driver for gold, but most of the impact should be felt beyond our forecasting horizon," the analysts said.
Originally published by: Neils Christensen on Kitco News
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