Rising inflation pressures due to the ongoing war in Iran mean investors will have to wait a little longer for gold to break out of its current consolidation phase, according to Carsten Fritsch, commodity analyst at Commerzbank.
Fritsch noted that gold’s price action since the war started has been counterintuitive to fundamental market beliefs. The precious metal, traditionally seen as an inflation hedge, has fallen even as the global energy crisis pushes consumer prices higher. At the same time, despite the chaos in the Middle East, gold has been unable to attract a safe-haven bid.
However, Fritsch explained that the gold market is currently struggling as market expectations around U.S. monetary policy have shifted dramatically since the Iran conflict began.
“Before the start of the Iran war, market participants had expected the Fed to cut interest rates by around 50 basis points this year. Since the start of the war and the resulting rise in oil prices, there has been a noticeable shift in interest rate expectations. Fed Funds futures currently imply a US key interest rate of around 3.8% at the end of the year. With an effective Fed rate of just over 3.6%, the market therefore expects the Fed to raise interest rates later this year. A 25-basis-point rate hike is fully priced in by spring 2027,” he said.
According to the CME FedWatch Tool, markets see more than a 50% chance of a rate hike in December.
The threat of rising interest rates is increasing the opportunity cost of holding gold, a non-yielding asset.
In this environment, Commerzbank has adjusted its year-end price target. The German bank sees gold prices ending the year at around $4,800 an ounce, down from its initial target of $5,000.
“This implies some upside potential for the coming months, as our new base-case scenario envisages a two-month transition period, followed by the reopening of the Strait of Hormuz and a decline in Brent oil prices, which should reverse the current expectations of interest rate hikes,” Fritsch said.
The updated outlook comes as gold prices continue to struggle below $4,500 an ounce. Spot gold was last trading at $4,483.95 an ounce, up 1.11% on the day. However, Commerzbank’s updated target suggests the market could see an 8% rally from current prices by year-end.
Fritsch said there is still potential for gold, as Commerzbank does not expect the Federal Reserve to raise rates this year. The bank’s economists forecast that rates will remain unchanged and that the next move is still likely to be a cut.
However, Fritsch said the next rate cut is not expected until at least the second quarter of 2027.
“We therefore maintain our price forecast of USD 5,200 per troy ounce for the end of 2027,” he said. “The structural factors supporting gold remain entirely intact. These include eroding confidence in the US dollar as a reserve currency, which is likely to lead to further gold purchases by central banks. Investor interest in gold is also likely to remain high. This is supported by the already high and rapidly rising levels of government debt, which are leading to monetary policy that is too loose when measured against inflation.”
Along with its revised gold forecast, Fritsch has also downgraded his silver outlook. Commerzbank expects silver prices to end the year at around $80 an ounce.
“In addition to the lowered gold price forecast, weaker industrial demand for silver also points to a slightly lower silver price. According to the latest assessment by the Silver Institute, industrial demand is set to decline for the second consecutive year, falling to a four-year low. Nevertheless, the silver market remains tight, which is why we expect the silver price to rise in the coming year,” he said.
Commerzbank projects silver prices to end 2027 at around $90 an ounce, down from its previous target of $95 an ounce.
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