According to Georgette Boele, analyst at ABN AMRO, the prospect of aggressive monetary policy easing by the Fed has weighed on the US dollar in a risk-on environment and lower US rates and a lower US dollar have boosted gold prices.

Key Quotes

“Our year-end target of USD 1,400 per ounce has been breached and prices have even rallied to USD 1,430 per ounce.”

“What do we expect going forward? In the near-term, the possibility of a 50bp rate cut by the Fed in July will continue to support gold prices. In addition, the price momentum is strongly positive, as is the technical gold price outlook. Dovish central banks are likely here to stay, and this is a major support.”

“Gold is not paying interest, so if interest rates elsewhere (such as in the US) decline, this will increase the relative attractiveness of gold as an investment asset. However, our US economist expects the Fed to cut by only 25bp rate at the meeting in July. If Fed speakers sound less dovish or if the Fed doesn’t deliver a 50bp rate cut, gold prices could drop considerably, because speculators hold extreme net-long positions in gold.”

“Even though the trend in the US dollar index has turned negative after breaking below the 200-day moving average, we do not expect a weak dollar across the board. A deterioration in investor sentiment will favour the dollar versus gold. We keep our year-end forecast for gold prices at USD 1,400 per ounce, which suggests gold prices are currently overshooting.”

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