Gold slips on dollar strength, but $5,000 target stays in sight

Gold prices slipped on Friday due to a stronger dollar and uncertainty over a US-Iran ceasefire, jolting nerves, but the yellow metal was on course for its third straight weekly gain.

As the dollar index gained, it consequently raised the cost of dollar-denominated gold for those holding other currencies.

The eruption of the US-Israel conflict with Iran on February 28 has led to a significant 10% drop in spot gold prices.

This decline is attributed to concerns over inflation, fueled by rising energy costs, and the resulting increased likelihood of higher interest rates.

However, prices have recovered somewhat over the course of the last couple of weeks. The precious metal had risen above $4,800 per ounce, but could not defend the level. 

Gold price outlook and State Street forecast

Still, State Street Investment Management's commodity analysts maintain a bullish outlook on gold, projecting a 50% probability that prices will fluctuate within the range of $4,750 to $5,500 for the remainder of the year.

The investment firm has revised its previously optimistic outlook, now identifying a solid support level.

Despite State Street's continued bullish outlook on gold, the recent selloff and current consolidation are expected.

Meanwhile, according to Roukaya Ibrahim, chief commodity strategist at BCA Research, gold prices are expected to rise through early 2027, despite current near-term risks. 

In an interview with Kitco News, she stated that the metal currently looks vulnerable due to factors such as speculative positioning, real interest rates, and geopolitical issues.

“Gold usually declines in the early phases of a supply shock, but 12 months out, it tends to recover,” she said.

The crucial shift occurs when the market shock's primary driver moves from inflation to growth concerns; this typically results in a decline in yields and a supportive environment for gold, she added.

Volatility disrupts Federal Reserve easing

Market expectations for the Federal Reserve easing have significantly changed since the start of the year. 

Initially, analysts observed that markets were pricing in 58 basis points of easing for the year.

However, this has been dramatically shifted due to the volatility in the Middle East, which has introduced significant supply-chain complications within the energy market.

The US Personal Consumption Expenditures (PCE) index, the Federal Reserve's key inflation metric, matched estimates by rising 2.8% in the 12 months ending in February, a rate likely to have increased in March. 

Attention is now focused on the March US Consumer Price Index (CPI) data, expected later on Friday, as investors seek further insight into the Fed's future monetary policy.

According to the CME's FedWatch Tool, the probability of the US Federal Reserve cutting interest rates by at least 25 basis points at its December meeting has increased to 31%, marking a rise from 20% in the preceding session.

Yet, gold prices show a degree of resilience, staying below $4,800 an ounce, despite the prevailing neutral monetary policy.

Oil price risks and long-term debt as catalysts

Even with the challenges, State Street advises investors to keep their attention on larger, enduring market movements instead of getting caught up in immediate interest rate forecasts.

Although rising oil prices are intensifying inflationary pressures, the firm cautioned that this situation presents a dual risk.

“While a prolonged conflict that sends ICE Brent prices north of $150/bbl would likely weigh on gold through the Fed and dollar channel, it would also increase the odds of recession or stagflation,” the analysts at State Street said. 

They further believe that if oil prices stabilise in the $80–85 per barrel range, gold prices could swiftly surpass $5,000 per ounce.

Additionally, State Street views the escalating and unsustainable level of government debt as a further long-term positive catalyst for gold, independent of US monetary policy. 

The Congressional Budget Office estimates that net interest payments on US federal debt are projected to surpass $1 trillion this year—an unprecedented milestone.

Furthermore, this growing debt issue is not confined to the US alone.

Among other precious metals, silver on COMEX was trading at $76.183 an ounce, down 0.3% from the previous close. 

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