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(Kitco News) – The gold market shows relative strength in the face of rising interest rates and a US dollar that continues to trade near its highest level since 2002. Now could be a tactical time to buy gold, according to one market analyst.
In her latest research note, Nicky Shiels, head of metals strategy at MKS PAMP, said that rising economic risks is helping gold find a solid floor around $1,660, even as the Federal Reserve is maintaining its aggressive monetary policy stance as it lowers its growth outlook .
Wednesday, after raising interest rates by another 75 basis points, economic projections from the US central bank signaled that the federal funds rate will peak around 4.6% in 2023. Although interest rates are expected to rise, the Federal Reserve lowered its growth forecasts, forecasting the US economy will grow 0.2% this year and 1.2%, down from June’s projections.
During the press conference, Powell warned consumers’ economic pain is on the horizon as the central bank focuses on bringing inflation down.
#Powell on aggressive rate hikes: No one knows if this process will lead to a recession or how significant this recession will be. It depends on how quickly price pressures come down and if we get labor supply. Failure to restore price stability would mean greater pain. #FAT pic.twitter.com/tEKFWPwsVJ
— Kitco NEWS (@KitcoNewsNOW) September 21, 2022
“Gold made new weekly lows and then highs (after Powell’s presser) in just 45 minutes; something that hasn’t happened on FOMC day in a while,” Shiels said in the note. “Powell was neither hawkish nor dovish, but gloomy; there will be further pain and a soft landing is increasingly unlikely. Not to mention the pace of Fed hikes clearly indicates a clear policy mistake on inflation.”
Shiels added that bearish speculative positioning could also now be working in gold’s favor as the precious metal has been unloved, seeing continuous solid selling through most of the summer. She noted that gold had been so beat up that it is becoming more immune to the Federal Reserve’s oversized rate hikes.
Shiels pointed out that the Sept. 20 headline from the Wall Street Journal, saying “Gold loses Status as Haven,” indicates how acerbic the mood is among gold investors.
“The irony is, akin to the frontpage’ kiss of death,’ only when one throws in the towel (when the last of the gold bulls give up) will gold then make a comeback,” she wrote. “This WSJ headline/article doesn’t do gold much favors, BUT there were very similar frontpage articles in 2015 (right after the 1st Fed hike), after which gold entered a bull market.”
With gold prices seeing a solid bounce from Wednesday’s two-year lows, Shiels said that gold has enough momentum to push $50 higher in the near term.
“We do not think this FOMC was a particularly dovish gamechanger (the Fed pivot is not visible), but its just that sentiment/positioning across US$ has gotten too overvalued & fully priced for hikes this year and similarly, sentiment / positioning has become too undervalued in Gold,” she said.
While gold has room to move higher, Shiels said that the market needs to see a fundamental change for a sustained rally.
“For Gold to care more about future economic pain (ie, regain its trait as a true haven), as indicated with continued US yield curve inversion, new bad news is required,” she said. “An escalation in geopolitics, where Putin announced a “partial mobilization” of forces to support his war in Ukraine, won’t alone drive breakout pricing in gold; its recycled old bad news.”
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