Gold Price Outlook

"Gold prices have risen strongly over the past couple of months. After touching an intraday low of $1,618.30 on 3 November, prices reached an intraday high of $1,871.30 on 4 January. This intraday high was the highest level that gold prices have been at since 13 June 2022. Not
only have gold prices risen 15.6% over the past two months, they have also recovered around four and a half months of price declines within two months.

Seasonal strength in prices and expectations in the market that the Fed will start to reverse rates during the fourth quarter of this year are likely to continue providing support to prices in the short term.

The biggest risk to positioning in the gold market, but also in other markets, is that market expectations of interest rates are not aligned with those of the Fed. While the Fed has been pretty consistent in saying that it will not lower interest rates in 2023, the markets believe that
economic contraction will force the hand of the Fed. The Fed has lost some of its credibility with the market, possibly because it kept calling inflation transitory in 2021 and did not tighten policy soon enough, which then led to inflation rising to multi-decade highs.

Unless there is a dramatic reduction in inflation or a meaningful and consistent weakness in the labor market, the Fed is unlikely to reverse course. While inflation has been showing signs of softening and is expected to moderate as the year progresses, a sharp decline in inflation is not expected. Meanwhile, the job market has been fairly resilient and while the labor market may soften as the expansion progresses, the consistency, pace, and weakness of job creation will be important.

Given the sharp run up in gold prices of late, gold prices are vulnerable to a short term pull back, but prices are expected to remain at presently elevated levels for the most part. If prices are able to settle above $1,880 a run up to $1,920 cannot be ruled out. Another soft print on U.S. CPI next week could be the factor that drives gold prices higher.

On the downside, gold prices have initial support at $1,790 and then $1,760. Profit taking or signs of strength in the U.S. economy, which would give additional credence to the Fed’s thinking, could drive gold prices lower to these levels. Seasonal strength in gold prices during the first couple of months of the year should help provide support to prices in the near term."