Will gold skyrocket to $3,000 or face strong correction?

Gold continued to hit record levels in recent weeks, amid escalating geopolitical tensions in the Middle East and continued strong demand from global central banks.

However, downward revisions of expectations regarding the timing of central banks' monetary policy easing and the continued strength of the US dollar raised some doubts about the possibility of the precious metal's ability to maintain its uptrend in the near future.

Continued record gains 

- Gold futures for June delivery reached on April 19 a record of $2,413 per ounce.

- Gold prices rose for the fifth consecutive week, up nearly 2% last week.

- The precious metal gained nearly 10% in the past month and climbed by around 15% year-to-date (YTD).

- Since October 2023 until the end of last week, gold leapt nearly 25%.

- Gold prices reached record levels over seven consecutive sessions earlier this April.

- Earlier this month, gold prices surged to a record peak of $2,448.80 per ounce, before retreating slightly from these levels.

Growth drivers

- The yellow metal recently got a push from escalating geopolitical tensions and speculations about potential interest rate cuts by global central banks.

- Explosions echoed over the Iranian city of Isfahan on April 19, in what sources said was an Israeli attack.

- Iran had launched around 300 drones and missiles against the occupied Palestinian territories last week, following an Israeli attack on Tehran's embassy in Syria.

- Tehran downplayed the incident, stating that it had no plans to retaliate against the recent Israeli attack on Isfahan.

- The current developments in the Middle East are dominating markets, said David Meger, Director of Alternative Investments at High Ridge Futures, adding that gold prices may decline as demand for secure investments weakens. 

- On the other hand, speculations about the course of monetary policy impacted the gold performance over the last months. 

- Over the previous months, gold leveraged on the global expected decline in the policy rates. Meanwhile, global central banks signaled the end of the monetary tightening as inflation slowed from a 2022 peak.  

- Additionally, the central banks’ high turnout for gold holding helped increase bullion prices.

- Globally, central banks bought 1,037 tons of gold in 2023, slightly lower compared to the standard purchases in 2022. 

Expectations of continued growth 

Some analysts expressed optimism that gold prices will likely maintain record highs over the coming period. 

Citi Group analysts said higher gold prices over the previous period were spurred by geopolitical tensions. It expected gold prices to hit the $3,000/ounce level over the next 18 months. 

On another note, economist David Rosenberg said the recent surge in gold prices was particularly impressive, as it outperformed other major assets, and overcame the headwinds that usually lead to a drop in prices.  

Gold managed to rise despite the strength of the US dollar, as the dollar index, which measures the US currency’s performance against a basket of six other currencies, rose nearly 5% year-to-date (YTD).  

Rosenberg sees gold prices potentially reaching $3,000 per ounce, implying a possible 30% uptick from current levels.

Goldman Sachs also raised its gold price target from $2,300 to $2,700 by the end of this year, describing the yellow metal as witnessing an “unshakeable bull market”.

Meanwhile, JP Morgan identified gold as the top option in commodity markets, projecting the precious metal to reach $2,500 per ounce this year.

However, Natasha Kaneva, Head of the Global Commodities Strategy at JP Morgan, emphasized the need for confirmation regarding inflation slowdown, labor market conditions, and the Federal Reserve's inclination towards lowering interest rates for gold prices to rise in the upcoming period.

Beijing Antaike Information Development Co., a Chinese research firm, anticipated that gold prices may continue to climb in the future, supported by strong demand expectations from China and uncertainty associated with the overall economy.

The People's Bank of China persistently increased its gold holdings for the seventeenth consecutive month, adding approximately five tons in March 2023.

China raised its total gold holdings to 2,262 tons, in its effort to reduce reliance on the US dollar.

Capital Economics stated that Chinese investors view gold as an alternative asset, particularly amidst declines in the country's real estate and stock markets in recent times.

Speculations for delayed interest rate cuts

However, the trajectory of gold prices is confronted with risks stemming from monetary policy outlooks, as market expectations pivot towards prolonged periods of high interest rates.

Many policymakers at the Federal Advisory Council (FAC) agree that a pressing need to lower interest rates is not required, citing the current economic robustness and the sustained inflation at elevated levels.

The US Consumer Price Index (CPI) rose 3.5% on an annual basis last March, marking the third consecutive monthly acceleration above analysts' expectations.

Financial markets tamed their expectations for the date and pace of US interest rate reduction this year. The CME FedWatch Tool indicated a nearly 67% probability of the start of a rate cut during the next September meeting.

Markets believe that the US Federal Reserve may cut interest rates twice in 2024, versus expectations of six cuts at the beginning of the year.

High interest rates negatively affect gold keeping, which does not generate a return for investors.

Lingering risks 

The developments of geopolitical tensions and monetary policy will impact on bullion prices during the coming period. 

“When there are geopolitical tensions, the natural response is for investors to flee to gold”, said Everett Millman, Chief Market Analyst at Gainesville Coins, pointing out that if the conflict further escalates, prices could go north of $2,500-$2,600. However, if there is a ceasefire, then they could fall to $2,200. 

Millman st cap for gold prices.

Xiao Fu, analyst at Bank of China International, noted that despite fading expectations of Fed's interest rate cut and normal profit-taking after the recent rapid gains, some pressure on gold is expected. However, a sharp price decline is unlikely.

Saxo Bank analysts see signs of a slowdown in gold's upward trend, which would potentially end this rise in bullion prices.

The bank indicates that if gold surpasses the $2,432 per ounce level, it will approach $2,500 an ounce.

However, Saxo Bank added that if gold drops below $2,319 per ounce, intensified selling transactions could push prices down in the short term towards $2,260 and $2,255.

Sources: Reuters, CNBC, Fortune, Saxo Bank, Bloomberg, World Gold Council, Yahoo Finance, CNN