scorecardresearchGold is getting hammered, but a rebound is coming

Gold is getting hammered, but a rebound is coming

Updated: 23 Sep 2022, 05:36 PM IST
TL;DR.

Traditionally seen as a 'safe-haven' asset, gold prices shot above $2,060 an ounce in March after Russia sent troops into Ukraine, triggering a confrontation with the West.

(FILES) This file photo taken on August 5, 2020 shows gold bullion bars after being inspected and polished at the ABC Refinery in Sydney.  (Photo by DAVID GRAY / AFP)

(FILES) This file photo taken on August 5, 2020 shows gold bullion bars after being inspected and polished at the ABC Refinery in Sydney.  (Photo by DAVID GRAY / AFP)

(Reuters) - Rising interest rates have dragged gold prices from near record highs six months ago to their lowest since April 2020, but analysts expect a rebound in coming months as rate rises slow.

Traditionally seen as a 'safe-haven' asset, gold prices shot above $2,060 an ounce in March after Russia sent troops into Ukraine, triggering a confrontation with the West.

But rapid U.S. monetary tightening has since pushed the dollar to 20-year highs, making dollar-priced gold costlier for many buyers. It also increased returns on government debt, making non-yielding gold less attractive.

Investors responded by selling. Gold is now at around $1,650 an ounce, down 20% from that March high, and speculators in U.S. gold futures are betting on further falls to come.

"U.S. monetary policy is firmly in the driving seat," said Carsten Menke, an analyst at Julius Baer.

If U.S. interest rates rise to 3.75%, which markets expect in November, gold could fall to around $1,580, Menke said, and if rates reach 5.5%, gold could slip towards $1,285.

The technical picture is also grim. Gold is "locked in a declining channel" with support at $1,645 and beyond that at $1,606, said Tom Pelc, a technical analyst and chief investment officer at Fortu Wealth.

But analysts are looking ahead to when interest rates stop rising and begin to fall - something they say should deflate the U.S. dollar, bring down bond yields and help gold.

Financial markets are pricing in a peak in the benchmark Fed funds rate next year, and possible cuts toward the second half of 2023.

"If gold prices go down, that's a buying opportunity," Menke said, predicting that gold could move towards $1,900 next year.

Analysts at Citi said gold would likely bottom out in September or October and prices should average $1,775 an ounce in the final quarter of this year and $1,870 in 2023.

Bank of America forecasts gold will average $2,100 in 2023.

Also supporting bullion are geopolitical instability following Russia's attack on Ukraine and fears that high interest rates will destroy economic growth without halting inflation - a condition known as stagflation.

Both of these scenarios encourage investors to buy gold as a safe store of value.

Gold is currently trading around $600 dollars an ounce above its 'fair value' based on interest rates, consensus inflation expectations and the strength of the dollar, analysts at Australian bank ANZ said.

First Published: 23 Sep 2022, 05:36 PM IST