The fact that gold prices have fallen by about 5% so far this year has dissatisfied many investors, but commodity experts at Bank of America have a somewhat more upbeat outlook for the precious metal.
The researchers stated in a report released on Monday that gold prices are currently 10% to 15% over fair value. The remarks are made as gold prices are picking up steam again after testing support at $1,700 per ounce. Gold futures for December were last trading at $1,743.70 per ounce, up 0.83% day over day.
“In our view, the gold market is factoring in break-evens well above 3% at the moment. All-in, we can justify gold prices stabilizing just below $1,700/oz by the end of the year,” the analysts said.
Although the U.S. dollar and increasing U.S. interest rates continue to be major obstacles for the gold market, Bank of America analysts believe that there is now a firm floor.
“For gold to hit $1,500/oz, nominal 10-year rates would have to hit 4%, which looks difficult against the backdrop of a slowing U.S. economy,” the analysts said. “For gold to fall to the lower end of the range, recent investor liquidations and outflows from ETFs would have to accelerate, which is not our base case, given that our FX and rate teams expect dollar strength to reverse and the nominal 10-year rate to decline respectively next year.”
The Federal Reserve plans to increase interest rates by 75 basis points later this month, which is why the statements are made. Real interest rates are predicted to peak at 3% in the first half of 2023 and decline to 2.50% by the end of the following year, according to experts at Bank of America. Nominal interest rates are predicted to conclude the year between 4.00% and 4.25%.
According to commodity specialists, gold will benefit from a peak in real interest rates.
“The Fed signaling a slowdown in the hiking cycle may ultimately bring new buyers into the market. Our FX strategists also expect a weaker dollar. As such, we continue to expect upside to gold as we move into 2023,” the analysts said.
Looking at other factors supporting the gold market, Bank of America said they expect continued growth in central bank demand.
“Remarkably, purchases have been relatively broad-based, with monetary authorities in Turkey, Egypt, Iraq, India and Ireland all adding to their holdings,” the analysts said. “These numbers confirm that central banks remain conservative in an increasingly uncertain geopolitical environment. Yet, while purchases from monetary authorities are supportive, their ca. 20% share in total implied investment is usually not sufficient to drive rallies alone.”
Original article was posted on kitco.com