Nikos Kavalis

The tail end of 2022 and start of this year have seen gold enjoy a strong boost from a sharply weaker US dollar. This weakness has largely stemmed from consensus expectations seeing US policy rate hikes grinding to a halt in the next few months, before they start to retreat. Indeed, at the time of writing, Fed Funds Futures prices implied no more than 50 basis points of hikes through to mid-year, and a policy rate that is lower than its current level by January next year. In turn, this expectation that the Fed pivots away from its recent hawkish stance is premised on expectations of easing inflation and weaker economic growth, or even a recession. Metals Focus feels that this outcome is highly unlikely, by financial markets that have in the past 15 years become far too accustomed to loose monetary policy and to a Fed racing to the rescue. These expectations are also not aligned with the messaging of the Fed – the dot plots for instance are showing significantly higher rates by year-end. Contrary to the consensus, we think that US interest rates will rise to the levels that the Fed has been signalling, even as inflation continues to ease. As US unemployment currently remains near historical lows, the US economy is relatively healthy and equity valuations are arguably still rich (long-term P/E ratio measures are still historically high), policy makers have the luxury of focusing on taming inflation, so that it returns to their target levels of around 2% sustainably. The realisation that cuts are not as near as markets expect will no doubt hurt asset prices across the board, including gold. Meanwhile, as real US interest rates/yields rise over the year, we would expect the dollar to regain some of its recently lost strength, adding further pressure to the gold price. By year-end, we would not be surprised to see gold fall below the $1,600 mark and we forecast an average price of $1,760 for the year.