Gold has surged to unprecedented highs, fueled by geopolitical tensions, a weakening dollar, and subdued real yields. However, experts caution that the precious metal’s rally could soon encounter obstacles, as expectations for interest rate cuts diminish.
In a recent note, strategists at MRB Partners advised against adding gold exposure at current price levels, foreseeing vulnerability over a 6-12 month period. They attribute this caution to expectations of a reduction in Federal Reserve rate cut forecasts, coupled with potential increases in bond yields.
The surge in gold prices has been propelled by a confluence of macroeconomic factors since October of the previous year, intensifying notably in mid-February. This surge coincided with relatively stable U.S. interest rates and a steady U.S. dollar, providing a conducive environment for gold’s ascent.
However, recent developments have signaled a shift in the landscape. Both the dollar and bond yields, particularly real yields, have been trending upward in recent weeks. This trajectory suggests a more challenging path for gold’s upward trajectory.
The increase in yields follows a series of hawkish statements from Federal Reserve officials, including Chairman Jerome Powell. Powell’s remarks this week indicated a reevaluation of the Fed’s stance on rate cuts in light of unexpected inflationary pressures.
Market sentiment has adjusted accordingly, with traders now anticipating the Fed’s first rate cut in September rather than June. This revised outlook includes fewer projected rate cuts for both this year and 2024 compared to previous estimates.
Despite the backdrop of rising yields and a stronger dollar, gold has continued to appreciate, albeit reaching overbought territory, according to MRB Partners. This resilience may be attributed to ongoing momentum and heightened demand for safe-haven assets amid escalating geopolitical tensions.
MRB Partners suggests that gold’s current strength is driven more by momentum than by any specific fundamental factors. However, they caution that significant vulnerabilities may emerge once central banks begin withdrawing excess liquidity from the markets.
As long as central banks maintain accommodative monetary policies, gold is expected to find support. Nevertheless, uncertainties loom as market dynamics evolve, potentially reshaping the landscape for the yellow metal in the near future.
