Inflation above target to prevent imminent rate cuts and XAU/USD bull run – TDS

Gold has recorded a surprisingly strong performance despite interest rates reaching a two decade high in the US and Western world. Strategists at TD Securities analyze the yellow metal’s outlook.

Fed will cut starting around the middle of the year

While the yellow metal is well supported in the current trading range above $2,000, there are no compelling reasons why gold should surge in the relative near-term. With US unemployment materially under 4%, wage growth above 4+% YoY, jobs gains at 350K+, GDP growth at 3+% and inflation running materially above the implied 2% target, the Fed has little latitude to start to take policy rates down from the current 5.50%.

As such, there is consensus that a March rate cut is off the table and May is being priced. High interest rates, modest speculative appetite and slumping physical demand suggest that lease rates may move to levels high enough to attract a significant amount of metal into the market. Meanwhile, high carry costs are also likely to see metal being pushed onto the market or may significantly reduce interest in new long acquisitions.

However, we believe the US central bank will cut starting around the middle of the year. For a sustained rally to start, the market will need to see a material weakening in economic data and an inflation rate that is closer to 2%. We expect that rates will drop by some 250 bps during the upcoming easing cycle, bringing effective rates to just under 3%. Once this becomes baked into broader expectations, Gold should rally again.