Gold prices are unlikely to continue falling for a long time, as the fundamentals of gold remain positive.
Gold prices have fallen 7% on COMEX so far this month, but experts say that the possibility of further interest rate reductions and higher inflation may boost the demand for precious metal.
Gold has been struggling since the US election result last week, as the dollar has surged.
The stronger dollar made gold more expensive to overseas buyers and thus limited demand.
Carsten Fritsch is a commodity analyst with Commerzbank AG.
A significantly stronger US Dollar and a sharp increase in US Bond Yields were the main reasons for the selling pressure.
In the long-term, however, a higher inflation rate could be in favor of gold.
The US dollar was already rising in the weeks before the election as it awaited a Trump win.
Fritsch stated that “however, the gold price continued to rise and reach new records.”
The market is acting according to a principle that says “buy the rumour and sell the truth” after the elections.
Inflation in the US is sticking
The US consumer price index was in line with expectations on Wednesday. The CPI index increased 2.6% on an annualized basis in October and 0.2% compared to September.
Inflation is a key indicator for the US Federal Reserve to determine the economy’s health and monetary policy.
Gold prices usually rise when inflation increases. Kitco.com reported that because inflation decreases the purchasing power of money, and increases demand for physical products, many people view gold as a good inflation hedge.
Donald Trump, the president-elect, is also expected to increase tariffs and implement tax cuts. It is predicted that this will increase prices in the US, and accelerate inflation.
CME FedWatch shows that traders have priced a 62.4% chance of the US central banks reducing rates by 25 basis point in December.
Fed Chair Powell is more cautious
Jerome Powell, US Fed chair, said on Thursday at an event in Dallas that the bank must be cautious with further cuts, as the economy is still growing, and the job market is solid. The inflation rate also remains above the 2% threshold.
The market was impacted by this as the likelihood of a Fed rate cut by 25 basis points in December dropped.
Experts believe that the new Trump administration may still pursue the Fed in order to ease their monetary policy.
Fritsch, of Commerzbank, said that the price for gold would increase significantly if Trump was to influence the Fed’s policy on monetary matters and if the Fed failed to react to higher inflation in the required way.
Analysts at Kitco.com believe that Trump may also put pressure on Fed to relax monetary policies to boost the economy.
Kitco.com reported that many people believe Trump will encourage the Federal Reserve into a more dovish position to boost economic development. This is because he has repeatedly expressed his desire for lower rates.
Gold’s retracement is an opportunity for investors
Last week, the US election results slowed down gold’s rally for the year. In a statement, the World Gold Council (WGC), said that this reaction was “a bit of a knee jerk sting”.
Gold prices have been impacted by the Trump victory, a continued strengthening of the US dollar, a rise in the yields on Treasury bonds, cryptocurrencies, and the risk-on mood of equities.
WGC stated that “These factors could presage a welcomed pause or even a healthy retracement near-term for gold.”
Investors will likely find buying opportunities in these uncertain times, particularly if the gold price continues to decline.
Kitco.com said that “the hedging function is important due to the ongoing inflationary pressures as well as geopolitical factors; a change of Fed policy could revive a positive tendency.”
Trump’s policies will keep gold in high demand
Experts say that Trump’s tax cuts will likely lead to an increase in the deficit.
Fritsch stated that this could raise questions about the creditworthiness of US government finances.
Fritsch said that gold would be a good investment, as unlike US government securities, it cannot be multiplied arbitrarily.
In this context, it is likely that central banks of emerging economies will seek to increase the percentage of gold in their currency reserve, which would also be accompanied with continued gold purchases.
Commerzbank AG still believes that gold prices could reach new records.
WGC also noted that despite current headwinds, gold prices are still supported by fundamental factors. The council stated that even if there is a retracement in the price, it will not turn into a crash.
WGC believes that the recent decline in gold is a short-term phenomenon.
The report said that, outside of the futures market, western investors have not bought much gold in this year, and there are unlikely to be a lot of buyers waiting.
In addition, the equity markets are highly concentrated and valued at the end of business cycles, while geopolitical conflicts remain high. Gold demand is expected to remain high in the long term due to these factors.
This post, Prolonged weakness in the gold price seems unlikely to experts, may be updated as new developments unfold.
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