The gold market is anticipated to experience a significant increase in prices in the coming months as the Federal Reserve prepares to cut interest rates. Bank of America analysts predict that gold prices could reach $3,000 per ounce within the next 12 to 18 months. However, for this to happen, there needs to be an increase in investment demand, which is contingent on a clear signal from the Federal Reserve about the interest rate cut.
Michael Widmer, a commodity strategist at the bank, emphasized the importance of non-commercial demand picking up alongside the anticipated rate cut. He stated that a gold price average of $2,500 per ounce could be justified if investment demand increased by 20 percent. Currently, non-commercial purchases have only increased by around 3 percent year-on-year, leading to an average gold price of $2,200 per ounce year to date.
Mohamed Hashad, chief market strategist at Noor Capital, highlighted that gold is benefiting from a weaker dollar and firm US Treasury bond yields. Investors are closely monitoring the upcoming release of the PCE Price Index, as it may impact expectations for a rate cut by the Federal Reserve. The CME FedWatch Tool now predicts a 66 percent chance of a rate cut in September, leading to a decline in the US Dollar Index.
Hashad also mentioned that investors are turning to gold as a safe-haven asset during times of market uncertainty and deteriorating risk appetite. Despite the current rise in gold prices testing the $2,330 level, there is still a negative bias due to recent chart patterns. The potential support levels for gold include $2,300, $2,277, and $2,222, with further declines targeting the $2,170-$2,160 range. On the upside, reclaiming $2,350 would open the door to key resistance levels.
Bank of America views rising bond yield volatility as another factor supporting the gold market. Central banks worldwide are reducing their exposure to the dollar and US Treasuries, making gold an attractive reserve asset. China, in particular, has been increasing its gold holdings while decreasing its holdings of US Treasuries, indicating a shift in preference towards the yellow metal.
Widmer also highlighted the significance of macro uncertainty in today’s market environment, especially considering the exponential growth in government debt. He explained that while a sharp increase in interest rates initially may lead to lower gold prices, the search for a safe-haven asset would eventually drive flows into the gold market. The inverse relationship between gold and rates may evolve but is unlikely to change significantly in the future.
