Standard Chartered says the risks of gold prices falling below $1,700 are limited

(Kitco News) Standard Chartered said that although gold lacks conviction at the moment with prices heading towards $1,700 an ounce, further declines remain limited.

The US dollar caused a lot of pain for gold prices during the summer months, forcing gold to conclude August with a fifth monthly loss. While the US dollar index traded near 20-year highs on the back of aggressive Federal Reserve rhetoric, December gold futures fell below $1,800 an ounce and last traded at $1,722.50.

However, the good news for gold is that it is unlikely to fall much further because most of the downside risk has already been priced in, said Suki Cooper, precious metals analyst at Standard Chartered.

“Although the yellow metal faces significant downside risks, it also benefits from tailwinds including recession risks, a price-responsive physical market, already tight positioning and rising inflation,” Cooper wrote in a report this week. “The possibility of higher interest rates has dampened investor appetite. And while we expect gold to head lower towards $1,700/oz in the fourth quarter of 2022, these factors are likely to limit the downside.”

Looking ahead, Standard Chartered sees the Fed rise by only 50 basis points at its next meeting in September and then pause at the November and December meetings. This is a slightly more pessimistic view than markets are expecting, with the CME FedWatch Tool priced at 70.5%, up 75 basis points in September.

“Our economists believe that the Fed will pause as the US economy is likely to lose momentum in the fourth quarter of 2022, and that US inflation will start to ease, albeit remaining high,” Cooper said. “Fears of slowing growth and increased risk of a recession should protect gold’s downside. At the moment, gold is largely taking its cues from the US dollar, with the three-month correlation trading at -58%.”

In the short term, the price of gold will get its direction from the aggregate data, especially the employment report, which will be released on September 2.

“We expect non-farm payroll gains to slow to around 275,000 (from 528,000 in July) and weaker average hourly earnings (AHE) growth of 0.3% m/m (from 0.5%), but we see the unemployment rate remaining at 3.5% Cooper noted.

Meanwhile, investor exposure to ETFs reveals less commitment to gold, as ETF holders have reduced their exposure over the past four months after the largest inflows in six quarters in the first quarter.

“While in the past year net redemptions were driven by long-term gold holders, recent outflows have only been dominated by position holders over the past two years, indicating that recent inflows have been less committed to gold compared to traditional ETF investors, Cooper noted.

Standard Chartered detailed it further: “Recent 13F quarterly filings reveal that half of the 10 largest holders of the largest gold ETFs increased their exposure to gold. While 49 holders added exposure of more than 100,000 shares (20.6 million shares), 54 owners reduced their exposure by more than 100,000. shares (32.2 million shares). It should be noted that a number of gold ETF holders have nearly eliminated their exposure, indicating much greater tactical interest.”

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