The gold rally has lost momentum, and the market may plummet by more than $300!

Gold has been on a rollercoaster ride this week, falling below the 2,300 support level at the beginning of the week under the weight of a strong dollar, and then trying to rebound on the back of U.S. economic data reinforcing expectations of interest rate cuts, and finally $2,326, up 0.22% for the week.

Gold prices have risen more than 4% in the quarter. "We continue on a slow downward trend in inflation. As a result, we see yields continue to slowly fall and bonds slowly rise, which is supportive of the gold market," said David Meger, head of alternative investments and trading at High Ridge Futures.

On Friday, hopes for the Federal Reserve to cut interest rates in September and December increased, after the Personal Consumption Expenditures (PCE) index showed that inflation did not rise from April to May.

According to the CME FedWatch tool, traders are now pricing in a roughly 68% probability of a Fed rate cut in September, up from 64% before the release of inflation data.

San Francisco Fed President Daly (who is also a member of the 2024 Federal Open Market Committee) said the latest inflation data was "good news that policy is working."

"Gold prices have been trading in a relatively tight range and are likely to remain in that range until the FOMC confirms they will cut interest rates," said Chris Gaffney, president of global markets at EverBank.

However, ING remains cautious about the outlook for gold, keeping its year-end target unchanged at $2,000.

Investors should remain cautious about the yellow metal as drivers diverge and traditional relationships break down as gold prices lose momentum due to divergent drivers and a breakdown of traditional relationships, according to a new report from Georgette Boele, senior economist at ABN Amro.

In her latest gold price forecast released on 27 June, Boele referred to her forecast on 15 April titled "Gold Prices Seem Uncapped".

"Since then, gold has hit new highs, but the rally has lost momentum," she noted, "and what to expect from the gold price for the rest of the year, we are approaching this question in a Q&A format." ”

The first question: did the expected central bank easing support gold prices? Boele said no.

"The market has long anticipated the possible start of an easing cycle by major central banks. Although the ECB started easing in June, we think the Fed will start later (the first rate cut is expected in September). In fact, expectations for monetary policy easing in the United States have decreased this year. So, from this perspective, gold should have moved lower rather than higher. ”

Do US real yields support gold prices? She said no.

"U.S. real yields are U.S. Treasury yields adjusted for inflation expectations," Boele said. Higher and positive real yields indicate that the market believes that the central bank is taking appropriate steps to curb inflation. In fact, the Fed postponed the easing of monetary policy because of stubborn inflation in the United States. ”

Boele noted that typically, if US real yields fall, gold prices rise and vice versa. But this year the relationship has broken down. U.S. real yields rose, while gold prices rose.

So is the US dollar's move supporting gold prices? She also gave a negative answer.

"So far this year, the dollar has performed well. The U.S. dollar rose about 5% against a basket of currencies. "The price of gold has also risen, close to 11 percent." Normally, if the US dollar rises, the price of gold will have a downward trend. ”

Another factor supporting the price of gold is the shortage of physical gold. In this regard, Boele is equally negative.

"During the Covid crisis, physical gold experienced a shortage. This has led to a high demand for gold in the futures market and a high premium for the purchase of physical gold," she noted. "Speculative positioning has increased so far this year, but the premiums for Eagle and Maple Leaf are below the long-term average (although still positive). Some other gold coins show negative premiums, with prices well below the spot gold price. ”

"Overall, there is no shortage of physical gold based on these factors," she said. ”

When asked if investors were hoarding gold, Boele's answer was "yes and no".

She noted that, on the one hand, ETF investors have reduced their positions in recent years, resulting in a total position of gold-backed ETFs below 2019 levels. "Normally, if ETF investors close their positions, the price of gold falls." But on the other hand, "speculative positions in the futures market have increased this year and are now relatively large (non-extreme)," she said. "The increase in speculative positioning in the futures market may have offset some of the impact of ETF position liquidation."

On why gold is still elevated amid these headwinds, Boele listed the three main factors she believes support gold prices:

First, investors buy gold in the futures market and other forms;

Second, central banks, such as the People's Bank of China, bought gold. Global gold reserves have increased this year;

Thirdly, the technical pattern presents a positive one, leading investors to trend buying.

However, she noted that since hitting a high of $2,450 on May 20, the rally has lost momentum and the price has fallen below the 50-day moving average.

"The important support range is $2,220-2,275, which is the previous top and bottom (previous breakout level). Below this level, the next support range is $2,115, where the 200-day moving average is located. If the price falls below the 200-day moving average, the long-term trend will turn negative. ”

So what are the expectations for the future gold price? In this regard, she listed a number of reasons why ING is cautious about the outlook for gold prices.

"First of all, the gold price trend is positive, but the momentum is weakening."

"Second, the positive correlation between gold prices and the US dollar and 5-year and 10-year US real yields is unusual. Although these changes have happened in the past, they tend to be temporary, usually lasting 3 to 6 months. If gold prices react to central bank expectations again, it is likely to remain stable relative to the US dollar and slightly higher against the euro, reflecting our Fed and ECB views versus the market. ”

"Third, there is no current shortage of physical gold, and central bank purchases are not sufficient to justify the current gold price. As a result, we keep our year-end forecast unchanged at US$2,000/oz. ”

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