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(Kitco News) – Despite a strong start in August, the gold market is struggling to find consistent bullish momentum as prices remain below $1,750 an ounce.
Market expectations for more aggressive Federal Reserve monetary policy continue to support the US dollar, which weighs on gold; however, one market analyst said bullish momentum trading in the precious metal is building.
In an interview with Kitco News, Huw Roberts, head of analysis at Quant Insight, said that according to his company’s research, the precious metal has entered a macro-regime and broken below fair value.
According to Quant Insight, with interest rates rising and a strong US dollar, gold should be trading around $1,760 an ounce. While gold is about 2% below its fair value, Roberts said traders may be waiting for a better entry point.
He added that gold has room to move lower as the Federal Reserve continues to raise interest rates throughout the year.
“You can’t argue that the Federal Reserve has been consistent throughout 2022 with inflation becoming their number one priority and fighting the inflation they need to tighten financial conditions,” he said.
While it is a challenging environment for gold, Roberts said there is still potential for the precious metal. He explained that in July, markets started prematurely to expect the US central bank to turn on its aggressive monetary policy; however, Powell’s aggressive comments overturned that expectation. Markets see a 76% chance of a 75 basis point move later this month.
“Gold investors got excited about a dovish pivot, and those expectations haven’t gone away; they’ve just been pushed back to the second half of 2023,” he said.
While the market currently believes in the Fed’s aggressive stance on inflation, Roberts noted that a lot could happen in the next six months.
“Looking at current macro fundamentals, gold is undervalued in the current environment, but it could still get cheaper. Our models tell us that investors may want to wait for a better entry point,” he said.
In terms of gold’s macro outlook, inflation was the main factor moving the precious metal in July; however, this month’s analysis of QI shows that the market is much more balanced between inflation, currency appreciation and corporate credit spreads.
Trying to interpret the data, Roberts said tighter financial conditions are pushing up corporate debt, pointing to growing economic uncertainty. Rising high-yield spreads reflect growing fears that the US economy is heading for a recession.
“It’s almost like a picture perfect picture of gold has emerged in the past month. It acts as an inflation hedge and a risk off-hedge,” said Roberts. “If you’re looking for a safe haven, what are you going to buy? You can’t buy treasure because of inflation; you can’t buy currency because of King Dollar, so gold becomes a natural choice.”
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