Golden Precipice: $1,885 or Bust

The gold market has significantly bounced from last week's seven-month low. But although bullish potential continues to grow, the precious metal is not entirely out of danger, according to one bank.

In his latest gold report, Ole Hansen, head of commodity strategy at Saxo Bank, said that gold prices need to see a solid break above $1,885 an ounce to create a new bullish signal.

While gold prices pushed to a two-week high and to within striking distance of $1,900 an ounce, it has not been able to maintain those gains. Stubbornly higher U.S. CPI data capped gold's rally Wednesday. December gold futures are currently trading at $1,881.80 an ounce, down 0.30% on the day.

Gold has struggled as higher inflation pressures are forcing the Federal Reserve to keep interest rates in restrictive territory for longer; however, Hansen noted that despite lackluster investor demand, gold prices have shown some resilient strength.

Hansen noted that gold-backed exchange-traded products have seen outflows of 224 tonnes in the last four months. He added ETF gold holdings are at their lowest level in 3.5 years.

"During the same time, gold has only lost 4.5% of its value, in our opinion, a satisfactory performance, not least considering the considerable headwinds from surging bond yields and the stronger dollar during this time. It highlights an underlying demand for gold, not only from central banks but also from traders seeking a hedge against a soft-landing failure," he said in his latest report. "We maintain a patiently bullish view on gold, and with that also silver and platinum, not least supported by the view the Fed is unlikely to raise rates further as the economy begins to soften."

Hansen said the biggest support for gold comes from the U.S. bond market, which is seeing its worst bear market on record, driving yields at the longer end of the curve to 16-year highs.

Hansen said Saxo Bank's fixed income team doesn't see the current environment as sustainable.

"In our recently published outlook for the fourth quarter, titled 'Bond. Long bond(s),' our core thesis is that real rates are too positive, creating a fallout from sectors and consumers with refinancing needs," he said. "An economic downturn, as the lagged effects of the recent rate hike cycle kick in, will force central banks into cutting interest rates, lowering the short-end of the U.S. yield curve and, as the effects deepen, the long-end of the yield curve will follow lower, reflecting the need for lower long-term real rates or even negative real rates."

Hansen has been a long-term gold bull since the start of the year despite the precious metal's lackluster performance. In recent interviews with Kitco News, he said that growing economic risks mean it is unlikely the Federal Reserve will be able to get inflation back down to its 2% target before it is forced to cut interest rates.

Hansen has said that an impending stagflationary environment will be positive for gold and potentially push prices to record highs.

Originally published by Neils Christensen at Kitco