Canadian bank TD Securities has doubled down on its bullish stance for gold this week, laying out what it says is a path to new record highs by December. The bank expects gold to smash through its previous highest price within four months despite the challenge of ongoing inflation and uncertainty around what action the Federal Reserve will take regarding its rate hikes program.
In a new research note, the bank’s head of commodity strategy, Bart Melek mapped out a likely scenario for the next few months. Reaffirming his belief in price highs, Melek said that while the Federal Reserve has refused to confirm or deny when rate increases will stop, it’s likely that an economic downturn is already on the cards.
He said, “The cyclicity and mean reverting nature of economic data surprises, along with the Fed’s restrictive rate policies, should work in tandem to precipitate a downdrift in US economic surprise indices.
“If the Fed Fund futures reaction remains constant, dropping on negative data surprises as it rose in response to positive surprises, the resulting lower yield along the forward curve should see gold rally.”
His sentiments echo those of other analysts, many of whom have stated that the Federal Reserve will take rate increases too far and push the economy into a recession.
Earlier this week, WisdomTree’s Head of Macroeconomic Research, Nitesh Shah said that the Feds were relying on old data when measuring inflation and had failed to account for the fact that levels were already falling. “That could potentially overdo it and raises the risk of recession,” Shah warned. “The rapid pace of rate hikes could have an outsized impact once the lag is accounted for.”
In other words, the Feds may already have put the economy on the road to recession – something which gives further credence to TD Securities’ projections.
Melek says we’re now reaching the end of a positive data cycle, and numbers should soon start to drop. This will have a knock-on effect and see gold prices then trending higher.
“When data is favourable relative to the consensus, as we have seen recently, adaptive behaviour tends to adjust market expectations to a higher and higher level,” he explained. “This typically manifests in economic surprise indices, which have jumped to their highest since March 2021 due to a recent run of stronger-than-expected data. But these upward adjustments will usually run their course in 2-3 months.
“When data starts to come in below expectations, over time, markets will likely rapidly adjust to negative surprises. This should drive rates (nominal and real) lower in the forward market, lifting gold.”
