Gold Prices Remain Dampened as Market Expects Fiscal Tightening

Despite its strong start last month, the gold market has yet to find consistent bullish momentum to push up the metal’s price. Market expectations for aggressive monetary policy action from the U.S. Central Bank continue supporting the dollar, which is weighing down the precious metal.

While the price of gold remains below $1,750 an ounce, analysts expect that the metal’s price will soon increase. In a recent interview, Huw Roberts, Quant Insight head of analytics, stated that according to his company’s research, gold had broken its level of fair value and entered into a macro regime.

Quant Insight uses advanced mathematical techniques to provide global multi-asset investors with a comprehensive overview of the market, which in turn, enables them to understand what’s going on under the surface. The company believes that the price of gold will soon increase to $1,760 an ounce, what with increasing rates of interest and the strengthening dollar.

In the interview, Roberts stated that while gold was roughly 2% below its fair value, traders could be fielding for a more lucrative entry point. He explained that the precious metals had room to go even lower, as the U.S. Central Bank continued to increase rates of interest; he noted that throughout this year the Central Bank had consistently made inflation its top priority and tightened financial conditions to help combat it.

In addition, Roberts stated that gold still had potential, despite its currently challenging environment. He argued that markets prematurely began to expect the Federal Reserve to pivot on its monetary policy stance in July. However, this expectation was soon dashed by Chairman Jerome Powell’s hawkish comments. Roberts noted that gold investor expectations about a dovish pivot hadn’t disappeared but had instead been rolled back to the second half of next year.

The analyst added that a lot could happen in the coming months, stating that based on current macro fundamentals in the present environment, gold was undervalued but could still become cheaper. Roberts explained that the generated models demonstrated that investors were probably seeking a better entry point into the market.

While data from July shows that gold’s macro outlook was mainly being driven by inflation, a recent analysis from Quaint Insight shows that this month the market is a lot more balanced between currency valuation, inflation and corporate credit spreads. Roberts expects that tighter financial conditions will drive corporate debt higher, which will in turn lead to an increase in economic certainty. This will favor the gold market and major players such as Freeport-McMoRan Inc. (NYSE: FCX).

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