The new tightening stance of the US Federal Reserve (Fed) is creating significant obstacles for the gold market, forcing one of the most optimistic organizations on precious metals to cool down expectations in the short term.
When gold prices began an unprecedented strong rally last year, the Bank of America (BofA) was one of the organizations that made the most positive forecasts. In January, this bank expected gold to reach the $6,000/ounce mark this spring.
However, the strong correction of the market in recent months has forced BofA's precious metals research group, led by Mr. Michael Widmer, to adjust short-term prospects.
Achieving the target of 6,000 USD/ounce is no longer feasible in the short term. However, the combination of a large budget deficit, lack of fiscal consolidation measures and the increasing demand for capital in the US – factors that once served as the basis for our initial price increase forecast – shows that gold still has room to rise again in the long term," the BofA report said.
According to Mr. Widmer, the change in US monetary policy expectations is the biggest obstacle to gold at the moment.
Earlier this year, the market also expected the Fed to cut interest rates. However, the conflict in the Middle East has increased inflationary pressure globally, causing investors to begin betting on the possibility that the Fed must raise interest rates before the end of the year.
According to the CME FedWatch tool, the market currently assesses the probability of the Fed raising interest rates before September at over 70%.
Mr. Widmer said that the increasing probability of the Fed continuing to raise interest rates until the end of 2026 is closely correlated with the decline in gold prices.
In other words, the market shift from expectations of interest rate cuts to tight monetary policy has reduced gold's potential for price increase by about 50%, if other factors do not change," he said.
BofA also warned that even if current geopolitical tensions are gradually resolved, inflationary pressure is still unlikely to disappear soon.
According to experts at this bank, the increasing geopolitical fragmentation is creating more pressure on the global supply chain and production costs. Meanwhile, service inflation remains high.
The report also noted that after the COVID-19 pandemic, commodity inflation increased sharply. Although it cooled down afterwards, the new US tariff policies continued to put more pressure on the price level. In addition, the supporting factor from the housing inflation reduction process is also gradually weakening.
However, BofA believes that structural factors will continue to support the long-term outlook for gold.
According to this bank, US economic policy still has many unusual factors when the budget deficit is maintained around 6% of GDP, while the amount of US government bonds held by foreign investors is gradually decreasing.
BofA cited the latest survey results for central banks showing that 74% of respondents predicted that the proportion of the USD in global foreign exchange reserves will decrease moderately or significantly in the next 5 years.
As long as that context does not change, we believe that gold still has momentum to increase again despite short-term difficulties," the analysis group said.
In addition, BofA also assessed that investment demand from the private sector still has a lot of room for growth.
The bank believes that if the market gradually eliminates expectations of interest rate hikes in the near future, investment capital may return strongly to gold.
Experts note that the total investment value in physical gold and gold-related financial products is currently only equivalent to about 5.5% of the total size of the global stock and bond market.
This shows that there is still room for investors to shift from the traditional 60:40 asset allocation model to the 60:20:20 model, in which gold and alternative assets play a larger role," the report said.
Although the short-term outlook has become more cautious, BofA believes that the factors that once boosted the gold market sharply in recent years have not disappeared. Accordingly, large budget deficits, a downward trend depending on the USD and geopolitical instability continue to be important supporting foundations for gold prices in the long term.
