Weakening resistance, the most difficult period for gold prices may have passed

Resistance to weakening gold prices

In the recently released report "Gold's Selloff Is Getting Long In The Tooth", BCA Research (an independent investment research organization specializing in macroeconomic and global financial market analysis) said that the gold price drop is approaching the final stage. Two factors that greatly affect the market are US real yields and the strength of the USD is said to be unlikely to continue to increase sharply.

According to BCA Research, most of the negative impact from opportunity costs has been reflected in the price. When real yields increase, holding gold is less attractive because the precious metal does not generate periodic cash flow. Conversely, if real yields are stable or decrease, pressure on gold prices will ease.

The market does not necessarily have to wait for the US Federal Reserve (Fed) to cut interest rates for gold prices to recover. More importantly, whether the actual yield has peaked or not. If monetary policy is not tougher than market forecasts, the resistance to gold may weaken.

BCA Research believes that the Fed's next interest rate hikes have largely been reflected by the market. Therefore, gold prices may be supported as the opportunity cost of holding non-performing assets no longer continues to increase.

Inflation is not the only factor

BCA Research notes that the view that gold always increases when inflation rises does not fully reflect market developments. Real yield, instead of mere inflation, is the variable that more clearly affects gold prices.

When inflation expectations are controlled and the Fed maintains its credibility, rising inflation can push real yields up, thereby putting pressure on the precious metal. Only when inflation erodes confidence in monetary policy or pulls real yields down, will the risk hedging role of gold become clearer.

Oil prices and tensions in the Middle East can still cause market fluctuations in the short term. However, the inflation shock due to strong oil prices may eventually turn into concerns about growth.

When high energy costs affect economic activity, the possibility of the Fed continuing to tighten strongly will be limited. This development may help stabilize real yields, while creating conditions for gold prices to form a support zone.

Central bank creates price base

In addition to the cyclical factor, the gold market is also supported by the diversification of foreign exchange reserves and gold buying activities of central banks.

BCA Research assesses that the buying rate of the official sector may have passed the peak period. However, this demand still creates a foundation for the market, helping gold prices maintain at a higher level than in previous periods.

The organization believes that gold is returning to its role as a macro asset, as real yields and the USD maintain a central position in the valuation process. Central bank buying activity is no longer the only driving force for price increases, but still limits the risk of deep decline.

In the long term, BCA Research forecasts that the USD may weaken as structural pressures increase. If this scenario occurs along with real yields no longer rising, the two biggest drags on gold will turn into supporting factors.

Although the outlook is assessed more positively, gold price movements still depend on the Fed's policy, the energy market, geopolitical tensions and the reserve needs of central banks.