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In a report published Wednesday, Bernard Dahdah, precious-metals analyst at Natixis, warned that gold prices could fall as low as $1,275 an ounce as the market deals with a stronger U.S. dollar as a result of rising bond yields.
The comments come as the U.S Dollar Index trades at a five-month high and 10-year Treasury yields remain above 3%, near their highest level since 2011. As a result, gold prices have fallen to five-month lows; June gold futures last traded at $1,288.30 an ounce, down 0.16% on the day. Along with U.S. dollar strength, Dahdah said that gold is vulnerable to lower prices in the near term as trade data shows that sentiment has turned bearish.
However, despite the potential for near-term weakness, the bank’s base-case scenario is for gold prices to average the year around $1,345 an ounce. For 2019, Natixis sees gold prices averaging $1,260 an ounce.
Meanwhile, the French bank sees less potential for the silver market as it expects the precious metal to average the year at $16.50, only slightly above current prices. July silver futures last traded at $16.30 an ounce, up 0.19% on the day. For 2019, Dahdah sees silver prices averaging $16.20 an ounce.
Quoting the bank’s foreign-exchange analysts, Dahdah said that U.S. dollar strength against the euro could be overdone and a correction would benefit gold prices.
“We think that gold prices could pick up towards the last quarter of the year as the ECB preps the market for a normalization of its monetary policy,” he said. “With our view on EUR/USD at 1.24 at the end of this year, we should see the price of gold heading again towards the 1,330/oz levels.”
Dahdah added that gold should also get a boost later in the year as the Federal Reserve maintains its gradual pace of interest-rate hikes with less aggressive monetary policy action.
“We do acknowledge that higher Fed rates might put further pressure on gold, especially if the Fed raises rates more aggressively. However looking at the data that was released a week ago, we do not believe that this will be the case for the time being,” he said.
In particular, Dahdah said that wage inflation, which has only grown 2.6% annually, does not support aggressive monetary policy action.
“It would take wage growth reach 3% (coupled with the very lower unemployment figures) for the Fed to start hiking rates more aggressively than the market expects,” he said.