Gold has surprised many by maintaining a strong performance despite interest rates hitting a two-decade high in the US and the Western world. According to strategists at TD Securities, the outlook for the yellow metal remains positive.
The current trading range for gold is above $2,000, indicating strong support for the precious metal. However, there are no clear reasons for gold to experience a surge in the near future. Factors such as US unemployment being below 4%, wage growth of over 4% year-over-year, substantial job gains, GDP growth of over 3%, and inflation running above the 2% target indicate that the Federal Reserve has limited room to lower policy rates from the current 5.50%.
It is widely agreed that a rate cut in March is unlikely, with expectations being priced in for a cut in May. High interest rates, limited speculative appetite, and a decrease in physical demand suggest that lease rates could move to levels high enough to attract a significant amount of metal into the market. Additionally, high carry costs may push metal onto the market or reduce interest in new long acquisitions.
Despite current conditions, TD Securities believes that the US central bank will begin cutting rates around the middle of the year. For a sustained rally in gold to occur, the market will need to see a significant weakening in economic data and a closer inflation rate to 2%. It is expected that rates will drop by around 250 basis points during the upcoming easing cycle, bringing effective rates to just under 3%. Once this expectation becomes widespread, it is anticipated that gold should rally again.
Additional insight:
Despite the current challenges and uncertainties, the global economy is showing signs of recovery and growth. As the economy continues to stabilize and inflation rates approach the target, gold may experience increased demand and a potential surge in value. It is essential for investors to closely monitor economic indicators and central bank policies to gauge the potential impact on gold prices. Additionally, geopolitical tensions and market uncertainties can also influence the performance of gold in the coming months.
