Gold prices seen to move higher on aggressive monetary tightening pullback by Fed

Gold prices will move higher on the Federal Reserve (Fed) pullback on aggressive monetary tightening, Emirates NBD said and noted spot gold will record an average of $1,825/troy oz in the first quarter of the year.
Gold prices have started 2023 in good shape, extending a rally from the last two months of 2022. Broad financial market expectation that the Fed will need to pull back on aggressive monetary tightening is helping to support the gold market even as Fed speakers show no sign of turning yet.
“We had expected that gold will do well in 2023 but thought the rally would come later in the year. We are now bringing forward our expectation that gold prices will move higher and be able to sustain at higher levels,” Emirates NBD said in a report.
Spot gold prices have gained around 2.6% year-to-date as of January 10, trading close to $1,870/troy oz and have rallied about 15% from the 2022 low of $1,622/troy oz.
However, prices remain below their 2022 peak of more than $2,050/troy oz, hit in March last year when the Russian invasion of Ukraine first threatened geopolitical stability and prompted a flight to havens, Emirates NBD said.
The relentless rise in rate expectations and UST yields, along with a stronger dollar, helped to sink gold prices over much of H2, 2022 but now the outlook for rates is more uncertain.
Fed officials still expect to see the Fed Funds rate at more than 5%, but markets aren’t buying that the Fed will need to be as hawkish. The latest nonfarm payrolls report for December showed another strong headline gain in jobs numbers but accompanied by a slowdown in average hourly earnings. In addition, near-term indicators of US economic activity have turned decidedly negative: the services ISM for December fell sharply to 49.6 from 56.5 a month earlier.
The evident slowdown in the economy—perhaps even qualifying for the Fed’s mythical soft landing—has meant that markets are anticipating that rates will peak at 5% mid-year and then start to move lower by the end of 2022.
Such a rate trajectory, Emirates NBD noted should mean range-bound UST markets and a softer picture for the dollar, all of which are positive for gold. Combined with a slowing but still high inflation environment and a fraught geopolitical environment, gold prices look warranted to remain bid this year.
“We expect spot gold to record an average of $1,825/troy oz in Q1 before pulling higher over the rest of the year with a target of $1,900/troy oz on average in Q4,” Emirates NBD added.