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(Kitco News) – Quiet inflation data is highlighting a potential peak in US interest rates, which is weighing on the US dollar, and now investors and market analysts are starting to target gold for an all-time high.
Nikki Shiels, head of metals strategy at MKS PAMP, said on Twitter that with Thursday’s rally, gold is about $30 away from all-time highs.
Gold futures for June are hovering around 13-month highs, last trading at $2,053.90 an ounce. The rally comes as the US dollar index is trading at its lowest level in two months, testing support under 101 points.
The US dollar is witnessing its third day of losses after the significant decline in the producer price index in the United States. The report said that wholesale inflation fell 0.5% last month, following February’s unchanged reading. In the past 12 months, inflation has increased by 2.7%.
According to some market analysts, the latest inflation data supports the current market expectation that after a 25 basis point hike next month, the Fed will end its most aggressive tightening cycle in more than 40 years. This cap in interest rates is expected to keep bond yields lower, which will continue to weigh on the US dollar.
Currency analysts at Brown Brothers Harriman said that in this environment, the US dollar will continue to suffer.
“The dollar may see some safe-haven offers from time to time, but until US yields recover, the dollar is likely to remain under pressure in the near term,” currency analysts said in a note.
At the same time, according to some analysts, there is very little room for gold to reach new all-time highs.
“Gold remains within a steady uptrend on the daily chart. It broke out of a symmetrical triangle offering a target above the all-time highs near $2075, and the recent pullback respected the upper trendline of the triangle,” said Matthew Simpson, chief officer. Market analyst at City Index. “If gold can rally to $2,075, we suspect it will simply crash to a new record high, given its historical significance and the potential for some to want to take some profits around the key milestone. But rising geopolitical tensions, a weaker dollar and yields could see the yellow metal up in End to $2,100 and beyond.”
Looking at the global currency market, some analysts see very little hope for the US dollar. Besides falling US bond yields, analysts note that a narrowing monetary policy gap between the Federal Reserve and the European Central Bank will support the euro over the dollar.
James Stanley, chief market analyst at Forex.com, said the European Central Bank will have to take some drastic steps to bring inflation back to the 2% target. He added that this situation will continue to support the euro against the US dollar in the near term.
Can gold hold the gains if it hits an all-time high?
Looking at gold, Stanley said that while he thinks gold has room to go to an all-new higher level, he doesn’t know if the rally will be sustainable.
“I think we might tick gold at $2,100 an ounce, but I wonder if it can hold there,” he said. “The big question investors have to ask is: Who is buying gold at this level?” He said. “Gold has strong momentum, but I don’t know if it has enough momentum to hold the all-time highs.”
Although the US dollar will remain weak, Stanley said he is also not convinced that the Federal Reserve is done raising interest rates. Economic data shows that overall inflation is declining. However, both CPI and PPI data show that core prices, excluding energy and food, remain elevated, highlighting the risk that high inflation is becoming embedded in the broader economy.
“Gold is looking at the bond markets, trying to look around the corner to see if the Fed is done or not, and I don’t think it is,” he said. “The Fed has one opportunity to control inflation and they can’t afford to miss it. If core inflation remains high, the Fed will have to keep raising interest rates.”
Stanley said that gold will see a sustained rally to all-time highs when the Fed gets comfortable that inflation is under control and starts cutting interest rates.
“I don’t know exactly when that will happen, but when it does, gold will take off,” he said.
Christopher Vecchio, head of futures and forex at Tastylive.com, said he’s bullish on gold in the near term because it has a lot of tailwinds. However, he added that he did not want to see gold rally from all-time highs.
He pointed out that the weakness of the dollar, the decline in real bond yields, and the uncertainty in global markets are all possible catalysts that may push gold to $2,300 an ounce.
“I like gold, but I’ll try to fade a violent breakout,” he said. “I think the gold market needs to see a slow and steady rally that will create a sustainable rally.”
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