Gold prices have dropped to six-week lows and are set for a weekly loss for the third straight week, but the downside in the yellow metal is limited as global risks, particularly recession and the Ukraine war, could continue to support it.

“While we expect significant price volatility going forward especially as the conflict in Ukraine evolves, we expect gold prices to remain elevated in the coming years compared to pre-Covid levels,” said research agency Fitch Solutions Country Risk and Industry Research.

Hawkish US Fed

Standard Chartered Bank precious metal analyst, Suki Cooper said gold is unlikely to fall much from hereon as most of the downside risks have been factored in.

On Friday, the yellow metal was ruling at $1,706.13 an ounce, up 0.6 per cent from Thursday. It is down 6.5 per cent year-on-year. 

Gold’s current fall is due to strong US economic data reinforcing the Federal Reserve’s hawkish stance against inflation by keeping interest rates higher over a longer period. Experts see the US Fed raising the interest rate to 4 per cent by the end of 2022. The rate could be hiked further next year. 

“The downturn in prices is a sharp reversal after gold briefly traded above $2,000/oz in early March on haven demand due to the Russia-Ukraine war. The geopolitical trade was short-lived as central banks around the world began to raise rates to combat inflation,” Switzerland-based Global investment bank and financial services firm Credit Suisse said in a report.

Easing of Covid curbs

Gold is lacking conviction slipping towards $1,700 but the downside is limited, Cooper said in her report this week.

But Fitch Solutions said gold prices continue to be dictated by competing economic forces “as a myriad of risks surrounds the global economy, but we believe the bearing of these issues is now toward the downside”.

“On the other hand, significant pressure on prices is stemming from the US Fed’s aggressive hiking and rising real bond yields, a stronger for longer US dollar, likely peaking of inflation in the third quarter as well as the continued easing of restrictions as vaccination rates continue to rise,” it said.

Cooper said: “Although the yellow metal faces significant downside risks, it also benefits from tailwinds including recession risk, a price-responsive physical market, already scaled-back positioning and elevated inflation.” 

Economic outlook grim

The prospect of further rate hikes has quelled investors’ appetite and all these factors will limit the downside to the yellow metal in the fourth quarter.  

Fitch Solutions concurred with this, saying the outlook for the global economy remains grim on the back of two consecutive quarters of negative growth. “There is also a high probability that the eurozone falls into recession and the US could see several more quarters of contraction in 2023. Moreover, risks to Chinese growth are to the downside. Amid such a clouded global backdrop, investor interest in gold’s haven status will remain strong,” it said.

But Credit Suisse said the downside risk in gold is increasing as it seemed to be solely depending on haven demand. 

Price projections

The research agency said gold prices are likely to average $1,800 this year compared with $1,799 in 2021. “Prices have averaged $1,844/oz in the year-to-date, and our 2022 forecast implies an average of $1,711/oz for the rest of the year,” it said, adding that its view for the bullion was bearish for the remainder of the year. 

Switzerland-based Global investment bank and financial services firm Credit Suisse said the precious metal will average around $1,725 this year.  

Fitch Solutions said gold prices could head towards $1,650 in the coming weeks after which buying interest will result in prices increasing in the fourth quarter before the yellow metal witnesses a resistance around $1,850. 

Credit Suisse said gold could rule at $1,650 next year, unchanged from its earlier projections, and $1,600 in 2024, down $50 from its previous estimate.