The gold market is facing a dark period. Prices have already fallen for three consecutive trades. However, there is a view that this is a short-term pullback. Bullion will be in a bullish trend for the rest of the year, Bloomberg forecasts.
The closer the big day comes, when the Fed is due to announce its first interest rate hike in four years, the lower the value of gold falls. Yesterday, gold was down 1.2%, or $24.20. The yellow asset was trading at $1,960.80 at the close of the session.
The US regulator's two-day monetary policy meeting starts today. The US central bank is expected to announce tomorrow how much it will raise interest rates this month.
Markets are now expecting the Fed to raise rates by 25bp in the first stage. There could be a total of five to seven rate hikes before the end of the year.
The prospect of higher rates reduces demand for the precious metal, which does not generate any income, unlike government bonds. On Monday, the yield on 10-year US bonds exceeded 2.12%, reaching the highest level since July 2019.
The bullion also came under pressure from a sharp collapse in the price of oil. Quotes slipped below $100 a barrel on March 14. Brent and WTI futures fell by 8% over the day.
The fall in oil prices is linked to signs of de-escalation in the Russo-Ukrainian conflict. The fourth round of talks between the conflicting sides took place yesterday.
Against this backdrop, risky sentiment has returned to investors, which has reduced the attractiveness of safe haven assets, including gold.
Nevertheless, many experts believe that the current decline in the value of the precious metal is a short-term phenomenon. And some of them expect an upward reversal immediately after the Fed announces a rate hike.
With both geopolitical and inflation risks intensifying at the same time, more and more analysts are inclined to believe that a Fed rate hike is not a serious obstacle to gold prices this year.
If the US regulator subsequently decides to tighten its monetary policy more aggressively, it could damage financial markets and increase the risk of recession. The crisis scenario is seen as a win-win for the precious metal.
At the same time, too slow a Fed response to soaring inflation could lead to even more uncontrolled price rises. This is also positive for the asset, which is a classic hedge against inflationary pressures.
Bloomberg analyst Mike McGlone is confident that soaring prices will lead to a significant rise in gold prices in the coming months. Also, a steady bullish trend in the precious metal market will be supported by the threat of a recession.
Gold stands to be a primary beneficiary, potentially along with US Treasury long bonds and Bitcoin," McGlone said. "We view the metal as a leading potential 2022 end-game performer, notably when commodities priced for supply shocks succumb to inevitable demand destruction," he added.
McGlone believes that by the end of the year, demand for oil will have fallen sharply and it will be trading at $50, while the value of the precious metal will set a new record.
McGlone drew parallels between 2022 and 2008, which spurred an enduring gold bull market and a bear market for crude oil. He described the war in Ukraine as a catalyst that will accelerate the process of greener technologies replacing fossil fuels.
The analyst believes that in the long term, the $2,000 mark, which has been seen as a strong resistance for gold over the past 2 years, is likely to become a steady support level. By the end of the year, M. McGlone expects the metal price to be around $2,500 per ounce.
