Weak dollar prospects, recession fears may spark a gold recovery

Expectations of a less hawkish US monetary policy environment and high investor cash allocations amid increased concerns of a recession may weaken the dollar and trigger a more sustained recovery in gold, equities and other commodities, precious metals analysts say.

Gold and silver prices are solidly higher already on safe-haven demand as China-Taiwan-US tensions have escalated this week. Short covering in the futures market and some fresh chart-based buying are also featured today, as the near-term technical postures for both metals have improved this week.

The market reaction to the July Fed meeting may encourage a more sustained fall in the dollar and run-up in risk assets. “This could benefit gold which was down in July as dollar strength continued and inflation expectations softened. In July, gold ETFs lost 81tonne ($4.5 billion) and speculative positions in gold futures turned net short for only the fifth time since 2006,” World Gold Council said.

Gold fell 3.5 per cent in July, leaving it down 2.9 per cent on the year at $1,753 per tory ounce. A strong dollar and sticky real yields weighed on gold in the first half of July. But softer inflation expectations mid-month and jobless claims a few days later in the US nudged the dollar and real rates down. Having faced a 6.2 per cent drop mid-month, gold rallied to finish the month down only 3.5 per cent, according to WGC.

US investment bank Goldman Sachs recently raised its year-end 2022. The gold price target is now $2500/oz, signaling a strong 2022 after gold prices ended 2021 down approximately four per cent. In the report, the bank noted, that the coming year could bring increased concerns of a US recession, which would lead to higher gold prices. The bank has long been bullish on gold, and this latest price target increase is yet another sign that it sees strong upside potential for the yellow metal.

Louise Street, senior analyst EMEA at the WGC, in a recent analysis said there are threats and opportunities for gold in H2 2022.

“Safe haven demand will likely continue to support gold investment, but further monetary tightening and continued dollar strength may pose headwinds. As many countries face economic weakness and the cost-of-living crises continue to squeeze spending, consumer-driven demand will likely soften, although there should be pockets of strength.”

Goldman Sachs also believes that the risk of inflation is likely a strong factor influencing gold prices this year. Goldman has said that inflation expectations may become “unhinged”, as inflation has become quite persistent, and has proven not to be transitory as previously expected by the Fed.

In their 2022 gold price forecast, analysts at the U.K.-based precious metals research firm Metal Focus said they expect gold prices to average the year around $1,830 an ounce, which would be a record high average price. The comments come as gold prices trade in relatively neutral territory, around $1,850 an ounce. Although the gold market faces some challenges in the second half of the year, analysts said it still remains an important safe-haven asset for investors.

— issacjohn@khaleejtimes.com