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(Kitco News) – Gold prices continue to trade near a three-month low, drawing little investor interest even as inflation pressures continue to rise.
Several commodity analysts said that gold is struggling while facing significant upward momentum in the US dollar, which continues to trade near 20-year highs. The dollar index was last trading at 104.50 points, up 0.41% on the day.
Meanwhile, June gold futures were trading at $1,840.60 an ounce, down 0.71% on the day.
Gold may continue to face strong winds as some currency analysts do not expect the US dollar to change direction at least before the summer.
Many factors are in line to support the US dollar over the next few months, said Biban Ray, head of North American FX strategy at CIBC Capital Market.
“The US dollar is likely to remain on solid ground in the coming months. This is primarily because there does not appear to be any slowdown in the way long interest rates are moving, and the overall liquidity picture continues to be one of ‘risk off,'” he said in Thursday’s report. “The Fed is already bullish, and the US dollar will find support against other currencies where policy settings are slower to adjust, or completely divergent.”
However, in the longer term, Rai said that the US dollar will not be able to maintain its current momentum.
“We continue to believe that markets will reassess where the Fed’s final interest rate pricing is, which should leave the US dollar a bit on the defensive while other big companies play catch-up,” he said.
Looking ahead, currency analysts at Capital Economics expect the US dollar index to have room to rise to 108 in the coming months, which is a 3% increase from current levels.
They noted that not only is the Fed’s strong monetary policy plan supporting the US dollar, but the growing risk of a global economic slowdown also provides a strong buying impetus for the dollar.
Analysts said, “We estimate that even after its 12-month rally, the US dollar is somewhat above its core ‘fair value’.” We also believe that the balance of risks is skewed sharply in favor of the Dollar. Should the global economy slow more than our already pessimistic forecast, it suggests that the US currency is likely to rise further as safe-haven demand increases, even if the Fed eases the tightening cycle.”
Capital Economics said that the only thing that could slow the US dollar would be the recovery of the global economy and an improvement in the balance between growth and inflation.
“This does not appear to be a realistic possibility until 2023 at the earliest,” the analysts said.
Although the US dollar is creating a challenging environment for gold, commodity analysts are not ready to part with the precious metal just yet. Several analysts note that gold continues to hold up well compared to other assets.
While gold is relatively unchanged during the year, the S&P 500 is down nearly 17%.
“Several factors justify holding gold for many major investors, which will limit the amount of outflows in the coming months,” analysts at Metals Focus said in a note published Thursday. “Even after the recent sell-off, stock valuations are still high by historical standards. All of these factors should encourage institutional investors to hold their current gold positions as a hedge against uncertainties. This in turn may prevent a massive sell-off in the gold market.”
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