Source: AFP
The going will likely remain tough for a zero-yielding asset like gold for the time being as a hawkish Fed boosts US yields and USD.
However, we believe gold’s downside risk from higher US yields will be more limited from here.
Prices for the yellow metal could bottom by early 2023 and see some upside as recession becomes a reality.
Source: AFP
The backdrop for gold will likely remain tough for the rest year as stubbornly high core US inflation keeps the Federal Reserve (Fed) hawkish. A positive turn for the gold could come by mid-2023 once we are past peak inflation and as US recession becomes a reality.
Tough going still for gold for now as a hawkish Fed boosts US real yields
Source: Bloomberg, Bank of Singapore.
Clear determination from the Fed to fight overheating inflation has weakened a zero-yielding asset like gold, as aggressive Fed rate hikes have boosted real yields and the USD.
We now expect the Fed to hike 75bps for the fourth time in November, followed by 75bps in December and another 25bps in February before shifting into a wait-and-see mode. A more aggressive Fed fuelling a widening of the interest rate differentials between the US and other major countries could continue to support the USD and fuel further liquidation of gold exchange traded funds (ETF).
Gold ETFs are poised for net outflows in 2022 before a potential bullion market rebound in 2023. At 95.6 million ounces, total gold ETF holdings have shed slightly more than 10 million ounces since the peak in April and are now 2 million ounces lower year-to-date.
Gold ETFs are poised for net outflows in 2022 but liquidation may reverse in 2023
Source: Bloomberg, Bank of Singapore.
Following the sharp rise in US 10Y Treasury yield to slightly above 4.0%, we believe gold’s downside risk from higher US yields is likely more limited. The UK’s fiscal U-turn, which has helped restore some calm to the gilt market, should limit the spillovers from higher foreign yields on US yields. But fears over further currency intervention by Japan – which needs to be financed by some USD asset sales – could continue to add to background pressure on US Treasury yields to the detriment of gold in the near term.
Prices for the yellow metal could bottom by early 2023 and see some upside against the backdrop of rising recession risks and prospects of a Fed pause in 2023. Our forecast remains for the 10Y Treasury yields to settle at 3.50% in 12 months’ time as the US economy slows.
Recent developments between Russia and Ukraine, including nuclear threats from Vladimir Putin, strengthens the case for gold as a tail risk hedge.
Overall, we still see gold prices rebounding towards in 6 to 12 months as the Fed rate hike goes on hold and US yields begin to drift lower, taking the sting out of the USD as well. However, a more hawkish Fed now is likely to significantly further heighten the probability that US recession becomes a reality in the coming year. This in turn could trigger further upside in gold prices later in 2023 than we currently forecast.
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