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After testing record highs just over a week ago, gold is looking at a broad range between $1,900 and $2,100, with ETF investors waking up in light of renewed recession risk, said Australia and New Zealand Banking Group (ANZ) in its latest note.
“The upward channel suggests a broad range of USD1,900–2,100/oz. Despite prices hitting a record high, the Relation Strength Index (RSI) is not showing an overbought level,” ANZ commodity strategists Daniel Hynes and Soni Kumari said.
Gold must break the critical resistance of $2,062 to see another significant move higher. “A break above this level could trigger fresh technical buying, and prices could trade in the unchartered territory of USD2,100/oz,” Hynes and Kumari wrote.
At the same time, any hawkish Federal Reserve sentiment could trigger a selloff down to $1,900, they added.
ANZ expects gold to hit $2,100 an ounce by the end of this year and $2,200 in the second half of next year. According to the bank, any price dips will be viewed by investors as buying opportunities.
A key new driver is ETF demand, which is finally recognizing the value of gold amid renewed recession fears.
“We expect gold ETF flows to turn positive for the rest of this year,” the strategists said Friday. “U.S. banking sector issues, elevated interest rates and uncertainty around the debt ceiling are dampening the economic outlook and boosting safe-haven demand for gold.”
Even though Federal Reserve Chair Jerome Powell has reassured the markets that the U.S. banking system is “sound and resilient,” contagion risk fears still dominate trading.
“Nearly 500bp of rate hikes over the last year are putting pressure on the U.S. banking system. The Fed recently disclosed that about 722 banks reported unrealised losses of more than 50% of capital as at the end of Q3 2022,” Hynes and Kumari said. “This could prompt investors to increase strategic allocations to gold for risk diversification. Gold ETF holdings have seen net increases of 56t since the Silicon Valley Bank crisis.”
Another big unknown is the U.S. debt ceiling crisis, with the June 1 deadline just over two weeks away. During the 2011 debt cap negotiations, the U.S. saw its credit rating downgraded, which led to lower U.S. dollar and higher gold prices. “In 2011, total ETF inflows amounted to 161t until the debt ceiling was raised in August 2011,” the note said.
On top of this, the U.S. economy is slowing down, with many analysts pricing in a recession in the second half of the year. Plus, U.S.-China tensions and central bank gold buying are boosting gold’s safe-haven appeal.
Emerging markets have been accumulating the precious metal as a way to avoid sanctions, ANZ pointed out, noting that Russia, China, India, and Turkey were the leading gold buyers in the past decade.
“Russia and China bought nearly 60% of total purchases in 2010-22, and this is likely to continue, although the drivers of that activity may shift. As China aspires to increase the CNY’s role as a reserve currency, gold buying is set to increase. And gold is an attractive proposition for a sanction-burdened Russia,” ANZ noted. “While gold is not a complete hedge against sanction risks until it is stored domestically, it does play a role in mitigating the impact of sanctions.”
Another aspect of this trend is the devaluation of the U.S. dollar, which fits right in with ANZ’s higher gold price projections. Since the 1970s, the U.S. dollar index lost 20% in nominal terms, while gold has risen 51 times, the note stated.
The U.S. dollar has been on a downtrend since peaking in September 2022, and slower economic growth and debt ceiling concerns could lead to additional loss of confidence in the U.S. dollar.
“The devaluation of the USD is another factor motivating EM central banks to diversify their reserves. Gold normally preserves its value while currencies have lost purchasing power due to the quantitative easing where they increased money supply by printing money,” Hynes and Kumari said.
The de-dollarization trend is part of the narrative as well, with emerging market currencies playing a bigger role in international payments. China has started settling trades with Russia using the CNY, while the UAE and India have been in talks to settle energy trades in INR. “This evolving multi-currency system will see a gradual shift in foreign reserve portfolios, and gold is likely to play an important role as this develops,” ANZ said.
One of the risks to this bullish gold outlook is the Fed surprising the markets with a hawkish pivot after signaling a pause in its tightening cycle in June.
“Although the Fed has indicated a possible pause at its next meeting in June, sticky core-inflation and a strong labour market suggest further tightening is not off the table. Consensus estimates are for a rate cut in 2023, but our baseline forecast is for no cuts in 2023. Any unexpected policy action could trigger price corrections, but such dips should be perceived as buying opportunities, in our view,” the ANZ strategists said.
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