Gold Digger: Gold could breeze through US$2600/oz on interest rate pivot, expert says
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Our Gold Digger column wraps all the news driving ASX stocks with exposure to precious metals.
Gold stormed US$2000 twice last week, but both attempts failed. This doesn’t mean gold is in trouble, according to FxPro senior market analyst Alex Kuptsikevich.
In fact, gold’s long-term upside potential is close to US$2640, representing 161.8% of the rally from the 2018 lows.
“Such an ambitious rally requires an impressive run-up, and we are likely witnessing one right now,” he says.
“The problems in the US and Europe caused gold and silver rallies as investors tried to park their capital quickly for fear of leaving their money in the banks.
“Such momentum is unlikely to be the basis for growth in the medium to long term, but changes in monetary policy could.”
That’s what gold bugs should be watching for.
Last week, the Fed raised interest rates with one hand while handing out liquidity to banks with the other. These are incompatible policy moves, says Kuptsikevich.
“Now the balance of power is such that the Fed would prefer to stop raising rates so that it does not have to act repeatedly as a lender of last resort,” he says.
“We saw a similar shift in Fed monetary policy in the past at the end of 2018, when the two-year gold rally began.”
A change in the central bank’s rhetoric promises a fresh impetus for buying, says Kuptsikevich.
“At the last meeting, the FOMC raised rates, but Powell said in a press conference that banking problems were cooling the economy as much as policy tightening.
“Although we have not received formal confirmation, this has cleared the way for a rate change.”
Gold prices are trading lower around dinner time in London (just ahead of our breakfast if you need the Full Greenwich).
This is thanks largely to an unfounded reinvigoration of US Dollar confidence in and around Wall Street. No one really knows why, unless maybe they’ve all found much safer financial institutions, like perhaps in the Cayman Islands.
The end result is both gold and other safe havens dipped while risk assets gained.
Gold futures too have fallen, although resistance seems to be around the US$1,975 mark. Most precious metals were trading lower by the close of business in London and Paris.
There’s a few market moving US data drops en route – but the unsolved, ongoing (yet largely ignored) American bank adventure is the underlying catalyst for price action. With inflation still at large and the stability of the US banking system entirely unresolved, there’s every possibility another run at US$2,000, is not hors de question.
Craig Erlam, senior market analyst at OANDA expects nothing less.
With additional central bank demand adding its not insubstantial voice, the chorus line for gold has risen a full octave (around 10%) since earlier this month when all that SVB shenanigans kicked off and we all had to sit back and watch another bank run.
Cue Mnsr Erlam:
“I think it’s very plausible that we see a strong performance in gold over the coming months. The stars appear to be aligning for gold which could see it break new highs before long”
Gold’s record high of US $2,075 was plucked in August 2020.
Meanwhile, an unremarkable but positive day for the gold majors, with only one of 14 +$1bn capped stocks posting a loss. That was IGO (ASX:IGO), which is predominantly exposed to nickel and lithium.
The rest either stayed flat or eked out gains of 1-2%.
Six of the top eight gold stocks by market cap have made double digit gains so far in 2023, led by major Newcrest (ASX:NCM) with 29%.
Here’s how ASX-listed precious metals stocks are performing:
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