World gold prices may skyrocket, but investors should be cautious

Information about the FED supporting gold prices

What investors are wondering is how much easing the gold market has reflected, as the precious metal ends the week above $3,600/ounce.

Jesse Colombo - an independent precious metals analyst, founder of BubbleBubble Report - said gold is not only a reaction to expectations of a loose US Federal Reserve (FED) but also to the uncertainty surrounding US monetary policy, as US President Donald Trump and his administration continue to push for interest rate cuts.

Colombo noted that the US labor market has clearly weakened and the risk of a recession could increase the new easing cycle, causing interest rates to decrease by up to 100 basis points. However, he warned of the risk of the FED overreacting.

The Feds loss of independence could lead to stronger-than-necessary easing. All this chaos will continue to support higher gold prices, the expert said.

Robert Minter - ETF Strategy Director at abrdn commented that the current moderate interest rate cut roadmap of the FED will continue to strengthen the technical breakthrough of gold to 3,700 USD/ounce. But he also stressed the risk of remaining leaning towards a strong gold price scenario, as the Fed could act more aggressively than expected.

He said that based on the yield on the 2-year bond term, there is a basis for the FED to lower interest rates by 100 basis points by the end of the year. The problem is how to do it.

Minter said the Fed could surprise with a 50 basis point cut after new labor data showed a sharp decline in job growth.

Last week, preliminary figures deducted nearly 1 million jobs - three times lower than the 10-year average and worst ever.

According to the CME FedWatch tool, the market sees only a 5% chance of a 50 basis point cut at next week's meeting. Meanwhile, the FED's updated March economic forecast only shows expectations of a double interest rate cut next year.

Although the expectation of easing is increasing, some experts warn that this could be a short-term risk for gold if the "sms" on Wall Street do not come true.

Prices may skyrocket but investors should be cautious

Lukman Otunuga - Senior Analyst at FXTM - said that a 50 basis point cut next week could easily put gold prices above $3,700/ounce. However, he advised investors to be cautious.

Since the market is expected to cut 25 basis points, the important thing is the updated dot plot chart, deciding whether gold will continue to increase or adjust. The market is expecting a total decrease of 50 basis points after September. Dot plots need to be suitable or higher to keep gold prices stable.

Any lower level can trigger a technical adjustment. Technically, if gold closes above $3,650 an ounce, prices could retest $3,675 and $3,700 an ounce. Conversely, if prices close below $3,650/ounce, prices could fall to $3,600 and $3,570/ounce, the expert said.

Michael Brown - Senior Analyst at Pepperstone - said that the market is over-evaluating the Fed's ability to loosen while inflation remains high. He predicted that the FED would hardly cut by 50 basis points next week.

I think the Fed could disappoint expectations, as the next cuts depend on economic prospects, while dot plots are likely to remain unchanged, signaling expectations of a 50 basis point cut for the whole year. While the market is discounting about 70 basis points, this could lead to a hawkish reaction, dragging down stocks, bonds and gold.

However, Brown remains optimistic in the long term: I see every correction in gold as a buying opportunity, as reserve funds continue to diversify and the Feds independence continues to erode.

Ole Hansen - Head of Commodity Strategy at Saxo Bank - also said he is looking beyond short-term fluctuations, as technical momentum could push prices up to $3,800/ounce. The current question is whether cutting interest rates will become a profit-taking opportunity. I think it is possible, but in general, this only strengthens the story of price increases, so every adjustment is a buying opportunity.