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The gold market has gotten ahead of itself and is due for a further correction after a relatively quiet week following its breakout to record highs, according to one major British Bank.
While off of last week's high above $2,200 an ounce, gold prices have rallied more than 5% this month. In recent comments, Stefano Pascale, Equity Derivatives Strategist at Barclays, said that gold’s surging bullish momentum is being driven in part by expectations that the Federal Reserve will begin its new easing cycle in June.
He added that gold’s nine-day rally this month is one of the longest bullish streaks for precious metals on record. However, he said that there could be limited upside for gold in the near term.
“Our model shows the yields and the U.S. dollar should have accounted for only one-third of the actual rally that happened. So there's something else at work. Now, we did some positioning analysis, and, basically, there's strong evidence that the Fed pivot sort of forced macro funds to switch from having a negative exposure to gold by positive exposure,” Pascale said in a recent interview with Yahoo News.
However, Pascale also noted that this gold rally might be a little premature as the precious metal typically is fairly quiet ahead of expected easing from the Federal Reserve. He explained that gold prices tend to rise after the first Federal Reserve rate cut, not in anticipation of it.
Although gold has not followed the typical pattern, this has been one of the most anticipated pivots for the Federal Reserve in recent history. Since the start of the year, the U.S. central bank has signaled that interest rates will be coming down in 2024, but it wants to be confident that inflation is falling back to its 2% target before it starts the new easing cycle.
Complicating the Federal Reserve’s stance is recent economic data that shows inflation remains stubbornly elevated. This week, the U.S. Consumer Price Index and Producer Price Index showed hotter-than-expected inflation pressures.
According to the report, consumer prices are being driven by rising shelter costs and higher gasoline prices. Meanwhile, the PPI is considered a leading indicator of inflation as it highlights rising costs early in the supply chain; businesses typically pass on higher costs to consumers.
Although markets still expect the Federal Reserve to lower interest rates at its June monetary policy meeting, confidence in this move is slowly starting to wane.
According to the CME FedWatch Tool, markets see only a 55% chance of a rate cut. Last Friday, markets saw a more than 80% chance of easing.
Pascale said Barclays expects the Federal Reserve to begin its easing cycle in June. He added that the Bank recommends investors use option call spreads to get some upside exposure to gold in the current environment.
“The advantage is that for a price, it has some sort of insurance built in. So you have upside exposure, but you're not exposed to the downside. And right now, I think volatility markets are giving you a really good entry point for that type of strategy,” Pascale said in the interview.
Kitco Media
Neils Christensen
