Gold and the US dollar have an inverse relationship as gold is priced in dollars. When the dollar falls, gold becomes cheaper for investors of other currencies and they tend to buy more of it. However, when the dollar rises, gold becomes more expensive for investors and demand is generally lower. This relationship is important when analyzing the price of gold.
ANZ Bank’s strategists believe that the price of gold will be influenced by market expectations around the Fed’s monetary policy. If the Fed tightens its policy, this could be a headwind for gold prices in the short term. This is because the dollar could strengthen as a result, making gold more expensive for investors.
However, ANZ Bank also believes that there is limited upside in the US dollar, which could lead to a tailwind for gold prices. They predict that even with higher terminal rates, the dollar is likely to weaken in the second half of 2023. This weakening of the dollar would make gold more affordable for foreign investors and increase demand for the precious metal.
Gold prices have been volatile in recent times due to the uncertainty surrounding the policies of the Fed. The central bank has been hinting that it may start reducing its bond purchases soon, which could be seen as the first step towards tightening monetary policy. This would be a bearish signal for gold prices in the short term, as it would lead to an increase in interest rates that would strengthen the dollar.
However, ANZ Bank thinks that the market has already priced in the Fed’s tapering, and the focus has shifted towards the timing and pace of rate hikes. If the Fed takes a more aggressive stance and raises rates faster than expected, this could be negative for gold prices. On the other hand, if the Fed decides to take a more patient approach, this could support gold prices.
The outlook for inflation is another important factor that could affect the price of gold. Inflation has been on the rise in recent months, fueled by supply chain issues and pent-up demand from consumers. If inflation continues to remain strong, it could lead to further rate hikes and strengthen the dollar, which would be bearish for gold prices.
However, there is a possibility that inflation could be transitory, as some economists have pointed out. If this turns out to be the case, the Fed may not need to hike rates as aggressively, which could support gold prices.
Gold is often seen as a safe haven asset during times of uncertainty, such as geopolitical tensions or economic downturns. The ongoing Covid-19 pandemic and geopolitical tensions between major economies could provide support for gold prices in the long run.
Moreover, gold also has industrial applications, particularly in the electronics industry. As technology advances, the demand for gold in electronics could increase, providing further support for gold prices.
In terms of technical analysis, the long-term trend for gold remains bullish, according to many analysts. The longer-term trendline is still intact, and gold has been consolidating in a range for several months, which could lead to a breakout in either direction.
In conclusion, the price of gold is likely to be influenced by various factors in the short and long term. The Fed’s monetary policy, the outlook for inflation, and geopolitical tensions are just some of the factors that could affect the price of the precious metal. While there may be headwinds for gold prices in the short term, ANZ Bank believes that the weakening of the US dollar in the second half of 2023 could provide a tailwind for gold prices. Gold can also provide diversification and a safe haven during uncertain times, making it an attractive investment for many investors.
