Although prices may still rise by year’s end, one bank anticipates more consolidation into the spring as the gold market struggles to sustain gains above $5,200 an ounce.
The market wants to finish the month on a high note because gold prices have rebounded following the late-January selloff, despite some short-term resistance. At $5,153.40 an ounce, spot gold was up over 5% this month.
Bank of America analysts reaffirmed their 12-month gold price prediction of $6,000 an ounce in their most recent commodity report, but they also noted that the precious metal will face some short-term challenges as investors acclimate to higher prices.
The experts stated, “After the recent bout of volatility, we are concerned about flows.” When purchases were fueled by the following three factors: 1) demand for bars and coins; 2) central bank purchases; and 3) ETF inflows, the gold boom truly took off. Nevertheless, there are indications that investors are slowing down the rate at which they are increasing their gold holdings. Therefore, we account for a time of perhaps lower gold prices into spring, even though the period of consolidation would not last long due to the revived tariff uncertainties.
In addition to the economic risks posed by the uncertainties surrounding U.S. tariff policy, the analysts stated that the gold market requires additional clarification from the Federal Reserve regarding its monetary strategy.
President Donald Trump nominated former central bank governor Kevin Warsh to succeed Jerome Powell as the new head of the Federal Reserve, which contributed to last month’s historic reversal.
Warsh is thought to be a conventional central banker who will support the Federal Reserve in preserving its political autonomy. BofA analysts, however, stated that Warsh’s candidacy isn’t as gold-negative in the long run as the selloff would imply.
“We recognize that we don’t know what the new Fed will bring.Most investors anticipate rising Treasury yields and a decline in the USD. It would be rare for gold prices to decline in tandem with a weaker US dollar. Therefore, we think that the influence of rates is the more important question. Warsh has indicated plans to lower the policy rate, which should help the yellow metal once more, according to the analysts.
However, the analysts noted that the central bank must also manage its enormous balance sheet, so interest rates are only a portion of the problem. Warsh has stated that he wants to reduce the size of the central bank’s balance sheet, but the BofA stated that this could be a challenging task.
Fed Treasury purchases have given commercial banks plenty of reserves since the Great Financial Crisis. These reserves may be depleted if the Fed reduces the size of its balance sheet through quantitative tightening, which might lead to a shortfall of liquidity that could subsequently affect the money market. The Fed is aiming to reduce the average maturities of its debt portfolio at the same time, but economists are worried that this could raise the danger of rollovers for shorter-dated assets while maintaining higher longer-dated rates. “We think investors could once again increase their exposure to gold if all that materialized without any fiscal consolidation, raising concerns about the deficit.”
