(Kitco News) - Gold investors should expect to see some further selling pressure in the precious metal, according to some analysts who have said that the market has run too far ahead of rate expectations.
While eventual rate cuts will drive gold prices higher, potential easing in March could be premature and some analysts note that the gold market has not been a very good judge of a potential pivot in monetary policy.
"Gold has benefited from the market pricing in rate cuts and elevated geopolitical tensions buoying safe-haven demand. However, prices may have entered overbought territory and gold has been known to price in monetary policy expectations prematurely over the past two years. While we expect the Fed's next move to be a rate cut, we do not expect it to materialise immediately," said Suki Cooper, precious metals analyst at Standard Chartered Bank, in a recent note.
Cooper added that she expects gold's near-term price action to be primarily driven by the health of the U.S. labor market. She explained that a rising unemployment rate could force the Federal Reserve to align with market expectations. According to the CME FedWatch Tool, markets see a more than 60% chance of a rate hike in March and have fully priced a cut in May.
Carsten Fritsch, precious metals analyst at Commerzbank, said that he is not expecting either the Federal Reserve or the European Central Bank to cut rates in the first half of the new year.
"A further price slide is on the cards if the premature interest rate expectations have to be scaled back. We only expect the price to rise lastingly to $2,100 per troy ounce in the second half of 2024 when the Fed begins lowering its interest rates," he said.
Some analysts have said that as investors take profits from gold's breakout rally, the critical level to watch will be the $2,000-an-ounce level.
"Although fundamentals remain in favor of the bulls, the technicals are looking bearish on the daily charts. The precious metal could see more volatility this week due to geopolitical tensions and key US economic data, including the NFP report. In the meantime, the negative momentum could drag prices towards the psychological $2000 level in the near term," said Lukman Otunuga, senior market analyst at FXTM.
While the gold market is expected to see some weakness in the near term, Nicky Shiels, head of metals strategy at MKS PAMP, said there is still plenty of potential for gold through 2024.
"We remain constructive Gold and our bullish expectations have been brought forward into Q1'24; we do not believe last night's breakup/out is ‘it' for 2024. The ongoing de-dollarization and/or the underlying fear over an upcoming recession, in which disinflation trends can allow for Fed cuts, is now bullish not just supportive," she said.
According to many analysts, the missing piece in the gold market remains Western Investment demand. Even as gold prices have surged to new all-time highs, investment in gold-backed exchange-traded products has been lukewarm.
In a webinar Tuesday, Michael Widmer, metals strategist at Bank of America, said that while he is bullish on gold through 2024, the market will need to see an actual rate cut before investors jump into the market.
"The gold market will need to see wider investment space to sustain higher prices," he said. "People are waiting for something tangible from the Federal Reserve before they invest in gold."
Originally published by: Neils Christensen on Kitco News
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