The Bear Before the Bull: Gold Prices Expected to Remain Low in Short Term Before Jumping Next Year

The Bear

Gold prices have surged above $1,950 per ounce due to subdued inflation pressures. However, despite Tuesday’s gains, an international bank holds a bearish outlook for the remainder of the year as the fear trade diminishes.

In his recent analysis, Bernard Dahdah, a precious metals analyst at Natixis, suggests that gold prices could drop by another 4%, bringing them below $1,900 per ounce. This projection is based on expectations of stabilization in geopolitical tensions in the Middle East, particularly as Israel’s conflict with Hamas remains localized within Gaza’s borders.

Despite the short-term bearish outlook, Dahdah anticipates long-term potential for gold extending into 2024 and 2025. He notes that even if a correction occurs, gold prices are likely to find support as the Federal Reserve begins cutting rates, possibly as early as May.

Dahdah states in the report, “Although we see gold prices retreating in the near term, behind a long-term cease-fire that will eventually come, prices will still average $1,883/oz in 2024 and rise to an average of $1,918/oz in 2025.”

As of the latest update, December gold futures traded at $1,968.10 per ounce, marking a nearly 1% increase for the day. Investors continue to analyze the most recent Consumer Price Index report, with Tuesday’s inflation data reinforcing expectations that the Federal Reserve is concluding its interest rate hikes in the current tightening cycle.

October’s CPI indicated a 3.2% increase in inflation over the past 12 months, representing the weakest rise since December 2021. The CME FedWatch Tool suggests a nearly 100% likelihood that the Federal Reserve will keep interest rates unchanged next month. Market expectations point to the first rate cut occurring in May, with a total of three rate cuts anticipated through the following year.

While the Federal Reserve has signaled the end of interest rate hikes, it remains committed to maintaining restrictive rates to ensure inflation aligns with its 2% target. Fed Chair Jerome Powell, speaking at an event hosted by the International Monetary Fund, stated that the committee is not confident it has done enough to bring inflation down. Powell emphasized the potential for further policy tightening if deemed necessary, expressing a cautious approach to balance economic data and the risk of overtightening.

The Bull

The robustness of the U.S. dollar has restrained gold prices throughout 2023, but according to Philip Petursson, Chief Investment Strategist at IG Wealth Management, the precious metal might be on the verge of a substantial breakout in the near future.

During a recent interview with BNN Bloomberg, Petursson expressed optimism, stating that even at the $2,000 per ounce mark, gold holds significant potential for an upward trajectory in the coming year.

“Gold has grappled with the strength of the U.S. dollar for the majority of this year,” Petursson noted. “They typically exhibit an inverse correlation, meaning as the U.S. dollar strengthens, gold tends to experience a slight weakening. Now, if we anticipate a softening of the U.S. dollar from this point forward—and that is our foundational expectation for 2024—that bodes well for gold.”

Petursson indicated that IG Wealth Management perceives gold as undervalued by as much as 20%. He anticipates that once gold overcomes the $2,000 barrier convincingly, it could potentially surge higher, reaching up to $2,400.

IG Wealth Management maintains a bullish outlook even if bond yields persist at multi-decade highs, and they remain optimistic about the U.S. economy achieving a soft landing without entering into a recession.

“As we navigate the remainder of 2023 and contemplate 2024, we maintain the perspective that higher bond yields will likely introduce some volatility into the equity markets,” Petursson stated in their 2023 third-quarter market review.

“Nevertheless, our economic outlook still leans toward a soft-landing scenario in the United States, fostering a cautiously optimistic outlook for equities over the next 12 months,” he added. “In the interim, fixed-income investors are poised to benefit from the overall increase in interest rates.”