Gold’s aggressive push toward $3,000 an ounce has pushed it into overbought territory, increasing the risk of a near-term sell-off.
Although gold prices have fallen below $2,900 an ounce as investors booked profits, one market analyst said the precious metal remains well supported. Rising inflationary pressures and the risk of a global trade war increase the likelihood of policy mistakes by governments and central banks, which could further boost gold prices.
On Friday, as the dollar remained strong after U.S. inflation data met expectations, suggesting that the Federal Reserve may be cautious about further rate cuts, spot gold fell below $2,840 an ounce for the first time since February 6, down 1.4% on the day and nearly $120 from Monday's record high. New York gold futures fell below $2,850 an ounce. Gold prices fell more than 3% this week, the biggest weekly drop since November last year.
"I don't think the PCE data will change the market's previous expectations for the Fed," said Jim Wyckoff, senior market analyst at Kitco Metals. Futures contracts tied to the Fed's policy rate showed traders on Friday were still betting the Fed would resume cutting rates in June.
“I think the main reason for the sell-off in the gold and silver markets was profit-taking that continued all week, coupled with a strong U.S. dollar index,” Wyckoff said.
In a recent interview with Kitco News, Nitesh Shah, head of European commodities and macroeconomic research at WisdomTree Asset Management, noted that his model suggests gold prices are overvalued by about 15%.
However, he added that the conviction behind the model is weak as the traditional drivers of the precious metal have been replaced by more dynamic factors, explaining that his model can explain about 65% of the current gold price movement.
“Central bank demand, China’s broader role in the gold market and other factors have not been around long enough to be accurately modeled at this time,” he said. “It is these emerging factors that are driving gold prices higher.”
Another factor that is difficult to measure is geopolitical uncertainty. Although the Federal Reserve has shifted to a neutral monetary policy stance as inflation risks remain elevated, Shah said he expects growing geopolitical turmoil to provide further support for gold prices.
"(U.S. President Trump) wants to use tariffs as a bargaining chip to achieve a range of other goals. But the risk of surprises is very high," he said.
Trump announced Thursday that he would impose 25% tariffs on imports from Canada and Mexico after a month-long pause. The tariffs are expected to spark a trade war as both Canada and Mexico have said they will retaliate with tariffs on U.S. products.
Economists have been warning investors that a global trade war could push up inflationary pressures and weaken economic activity.
“If we do get into that recession-inflation scenario, that could be a huge positive for gold,” Shah said. “From that perspective, gold prices could go way up and that 15% overvaluation would be meaningless.”
Meanwhile, Shah said strong Chinese demand and central bank buying will support gold's long-term uptrend.
While higher gold prices are impacting physical demand, Shah believes that demand elasticity in China is significantly lower than in other trading hubs.
Turning to central bank demand for gold, Shah noted that official reserves remain quite low compared to historical levels, noting that China’s gold holdings account for only about 5% of its total reserves.
The article is forwarded from: Jinshi Data