The gold market still has difficulty maintaining its upward momentum above the 5,200 USD/ounce mark. Although the price still has room to rise at the end of the year, a bank believes that gold is likely to enter an accumulation phase that lasts until the end of spring.
Despite facing short-term resistance, the gold market is heading towards closing the month with a fairly solid price base, as prices have recovered after a sell-off at the end of January. The nearest spot gold was traded at 5,178.99 USD/ounce, up more than 5% this month.
In the latest commodity report, experts from the World Bank Bank of America (BoA) reaffirmed the gold price target for 12 months as 6,000 USD/ounce. However, they also acknowledged that the precious metal is under some short-term pressure as investors gradually adapt to higher price levels.
We are concerned about capital flows after the recent period of strong fluctuations," the analysis team said. "Gold's upward momentum is really exploding as buying power comes from all three engines at the same time, including demand for gold bars and coins, central bank buying activity and capital inflows into ETF funds. However, signs have emerged that investors are slowing down in increasing gold holdings. Therefore, we are considering the possibility of gold price weakening in a prolonged accumulation period in the spring, although the incertitude to return related to tariffs may make this adjustment time not too long.
Besides the economic risks arising from uncertainty in US tax policy, analysts believe that the gold market still needs more clarity from the US Federal Reserve (Fed) on monetary policy orientation.
The historic strong adjustment last month partly stemmed from President Donald Trump's nomination of former Federal Reserve Governor Kevin Warsh to replace Jerome Powell as Fed Chairman.
Mr. Warsh is seen as a traditional monetary policy maker, who can help the Fed maintain political independence. However, according to Bank of America experts, in the long term, Mr. Warsh's nomination is not as negative for gold as the recent sell-off level reflects.
We acknowledge that there is still much uncertainty about what the new Fed may bring. Most investors expect the USD to weaken and Treasury bond yields to rise. It is uncommon for the greenback to weaken while gold prices fall. Therefore, the bigger problem lies in the impact of interest rates. Mr. Warsh has stated his intention to cut the operating interest rate and this may once again support the precious metal" - analysts said.
In the opposite direction, the analysis group believes that interest rates are only part of the story, because the central bank also faces a huge balance sheet. Mr. Warsh once said that the desire to narrow down the scale of this balance sheet, which Bank of America assesses as a significant challenge.
“After the global financial crisis, the Fed's bond buying programs have provided commercial banks with abundant reserves. Narrowing the balance sheet through quantitative tightening may reduce that reserve, thereby potentially risking illiquidity and spreading to the monetary market. At the same time, the Fed wants to shorten the average term of the debt portfolio, but this raises concerns about the risk of debt rollover with short-term instruments, while still potentially pushing long-term yields up,” analysts said.
If all these factors occur without fiscal consolidation measures, increasing concerns about budget deficits, we believe that investors may once again increase their gold holdings.
