Gold's bearish momentum is fading, prices to hit $2,050 after moving past this level – ANZ

NEW YORK (May 11)  Despite being down 1% on the day, gold's downside is limited as $1,800 an ounce serves as a solid price floor for the precious metal, according to Australia and New Zealand Banking Group (ANZ).

Gold's environment remains challenging in the short term as soaring U.S. Treasury yields and a strong U.S. dollar are key obstacles to higher prices. But gold does not have far to fall before it finds its bottom.

"We see the short-term key support level being USD1,850/oz. Should it break below this, prices could easily retreat to USD1,800/oz," said ANZ senior commodity strategist Daniel Hynes and commodity strategist Soni Kumari. "Aggressive monetary tightening, rising yields and a stronger dollar are key drags for the gold prices."

The concern in the short term is market volatility triggered by fears that the Federal Reserve won't be able to control inflation, leading to aggressive hikes and recession talk. ANZ is pricing in half-a-point rate hikes in June and July, with the terminal rate rising to 3.75% by mid-2023.

"The spread between the fed funds rate and CPI is at its widest, suggesting the Fed is struggling to contain inflation. Concerns about global economic growth, fuelled by to sustained inflation and heightened geopolitical risks, should protect the gold price somewhat. We expect gold to remain supported at USD1,850/oz, with upside potential of USD1,950/oz," Hynes and Kumari said this week. "We expect downside risks to be limited after the price hits USD1,850/oz."

In the meantime, the upside potential is much more flexible, with prices looking to hit $2,050 an ounce after breaching $1,930, the strategists added. At the time of writing, June Comex gold futures were trading at $1,837.20, down 1.15% on the day. 

"We see a falling wedge formation on the chart starting from early March, which suggests bearish momentum is fading. Prices have hit a lower bound of USD1,830/oz, and we expect a trading range of USD1,850–1,930/oz in days ahead," they wrote. "A convincing break of above the upper trend line of USD1,930/oz would confirm a bullish move. Once this level breaks, prices could touch the previous highs of USD2,000/oz and USD2,050/oz."

Economic and geopolitical risks continue to work in gold's favor in the form of safe-haven money flows into the precious metal.

"The uncertainty facing the euro area economy is intense, given elevated energy costs and uncertain gas supplies, plus rapidly accelerating inflation. Further, corrections in equity markets amid the uncertain economic backdrop will benefit gold's status as a risk diversifier," Hynes and Kumari noted.

On the geopolitical front, gold will get a boost from a potential EU ban on imports of Russian oil and more central banks opting for a more significant allocation to gold as part of their official reserves.

"The European Union's bans on oil and gas imports from Russia could … trigger protectionism, further disrupting commodity supply chains. So the ongoing risk is likely to support gold's appeal as a safe-haven asset," the strategists explained.

They added: "Central banks tend to diversify their foreign currency reserves during crises, increasing their gold buying. De-dollarisation (a move away from the U.S. dollar) has been driving central bank purchases in recent years, with China and Russia buying more gold. Russia holds 21% of its reserves in gold. Further sanctions could trigger more gold purchases by central banks."

KITCO