Gold is profiting from the market turmoil. But if the Fed sees an additional need for action to combat inflation, Gold is likely to shed some of its latest gains again, economists at Commerzbank report.
Market should once again start betting on rate cuts in H2
“The market now only expects the Fed to hike rates to 5% by May, after which rate cuts are envisaged until the end of the year. That said, we believe that the Fed will raise interest rates to 5.5% by mid-year and will only start lowering them again next year. This could trigger another fall in the Gold price towards the $1,800 mark in the second quarter, followed by a rise to $1,950 by year’s end.”
“After all, the market should once again start betting on rate cuts in the second half of the year. The week that is now drawing to a close has demonstrated how much the Gold price can profit from this.”
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Gold Prices are expected to remain volatile in the second quarter of 2021, according to a forecast put forth by Commerzbank. The bank’s XAU/USD forecast suggests gold prices will sink toward $1,800 in Q2 before rising to $1,950 by the end of 2021.
The current Commerzbank forecast follows bullish gold price action witnessed in the first quarter of 2021. After taking a small dip in February, gold prices rose to a two-month high in March. Prices have held steady in April, staying well above the $1,700 per ounce level.
Going forward, Commerzbank analysts note that demand for gold has been driven largely by macroeconomic factors, such as inflation worries and rising yields. The bank believes these trends will remain in play throughout 2021 and could lead to further declines in the U.S. Dollar.
In the near-term, Commerzbank expects gold prices to remain under pressure due to rising Treasury yields, which could potentially make the precious metal a less attractive investment. Average 10-year yields have spiked to 1.74 percent, the highest since February 2020.
That said, Commerzbank analysts note that investor discipline could become a major factor driving gold prices in the second quarter. The possibility of further monetary and fiscal stimulus is likely to motivate investors to put money into gold.
The bank believes that any potential downside risks have likely been priced into the market, and gold prices could start to rebound as disciplined investment flows back into the market.
Looking further out to the fourth quarter of 2021, Commerzbank forecasts gold prices to reach $1,950 per ounce. The bank admits there is a significant degree of uncertainty surrounding the gold price forecast, which could potentially be altered by shifts in global economic and market dynamics.
Overall, Commerzbank believes gold prices will remain volatile in the second quarter, though longer-term the forecast is optimistic. The bank suggests that an expected rise in disciplined investor flows could provide a catalyst for further gold price gains before the end of 2021.