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(Kitco News) Gold may average $2,000 an ounce in the fourth quarter of this year as speculators increase exposure and the Federal Reserve cuts interest rates, Dutch bank ING said.
Some pullback in gold is inevitable after a massive rally over the past three weeks, said Warren Patterson, head of commodities strategy at ING. But there is ample trading room for price action in the second half of the year.
“While we expect the price to decline in the near-term, we see gold prices rising in the second half of 2023 and expect spot gold to average $2,000 an ounce in Q4’23,” Patterson said. “The assumptions here are that we see no further deterioration in the banking sector and that the Fed will start cutting rates later this year.”
Patterson has broken down speculative positioning in gold for a behind-the-scenes look.
“CFTC data shows speculators have increased their net long position in COMEX gold over the past few weeks. The net long position of money under management has increased by 67,047 lots to 106,955 lots since the end of February. Speculators had already increased their positioning late last year and early this year – expecting the Fed not to be too far off the fed funds top,” he said.
But there is still room for more speculative positions. And the right trigger would be continued concerns in the banking sector and a pivot by the Fed.
There are some signs that speculators are increasing their exposure to gold, Patterson noted. “The current net long is slightly below the level of January this year, well below the level at the start of the Russia-Ukraine war, well below the level during the Covid lockdown period and below the record net long of around 292,000 lots seen in September 2019,” he said.
Also, the current net long position in COMEX gold is around 22% of open interest. Historically, gold has seen spec length up to 50% of open interest, Patterson added. And the long/short ratio for speculators in COMEX gold currently stands at 3.72, well below the record 90+ recorded at the height of the Covid lockdowns.
Meanwhile, trends in gold-backed ETFs are reversing after seeing significant outflows over the past year. Over the past two weeks, the ETF net buy has been 36 tons.
Due to geopolitical uncertainties and the economic climate, the central banks’ gold purchases will remain a driver this year. “Strong buying has continued into 2023, with Turkey and China adding another 23 tons and 15 tons, respectively, in January 2023,” Patterson said.
ING’s baseline scenario sees the banking crisis contained, the economy slowing, inflation falling and the Fed appearing comfortable with recent rate hikes.
“Fed policy will likely be key to gold over the medium term. The Fed is probably nearing a peak in the Fed Funds Rate and we could see a turnaround in the second half of this year. Recent events suggest that credit flows will become more restrictive – this will weigh on the economy and cause inflation to fall even faster,” Patterson said.
The Dutch bank is not ruling out another rate hike of 25 basis points in May, but expects rate cuts in the second half of the year. “We expect the Fed to cut 75 basis points in the fourth quarter. We expect real yields to follow lower policy rates later in the year, which should prove supportive for gold prices,” Patterson added.
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