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Gold: 3 Reasons to Buy Now as All-Time High Beckons

In recent times, gold has been making waves in the financial world, experiencing an 8.2% surge since the beginning of the year. Leading economists at UBS predict that the precious metal is poised to surpass its all-time high in the near future, backed by a combination of factors that span the medium to long term. In this comprehensive analysis, we will delve into three compelling reasons to consider buying gold now, exploring the robust demand from central banks, the impact of a weakening US dollar, and the potential for safe-haven flows triggered by rising US recession risks.

Reason 1: Robust Central Bank Demand
Central banks have been increasing their gold purchases, with an estimated 700 metric tons expected to be acquired this year. This figure surpasses the average purchase levels since 2010, which were typically below 500 metric tons. Heightened geopolitical risks and elevated inflation are the primary drivers behind this trend. UBS economists anticipate that central bank buying will continue, providing support for gold prices.

Reason 2: Weakening US Dollar Supports Gold
The direction of a weakening US dollar is clear, and UBS analysts believe that the reduction in US yield carry will continue to weigh on the greenback. Historically, gold has performed well when the US dollar softens due to their strong negative correlation. With expectations of another round of USD weakness over the next 6-12 months, this presents a favorable environment for gold investors.

Reason 3: Safe-Haven Flows Amid US Recession Risks
Recent data from the US indicates a slowdown in the country’s growth, accompanied by tighter credit conditions. The Federal Reserve’s Senior Loan Officer Opinion Survey further reinforces the potential impact on growth and corporate profits. Based on historical data since 1980, gold has exhibited significantly improved relative performance against the S&P 500 during US recessions. Thus, rising US recession risks may prompt investors to seek safe-haven assets like gold, potentially driving its price higher.

Commerzbank’s Limited Downside Potential Assessment
While gold has experienced its largest weekly loss since early February, Commerzbank’s strategists believe that the downside potential is limited. The recent slump in gold prices can be attributed to positive US economic indicators and a robust labor market, which dampened hopes of rate cuts. Moreover, the ongoing US debt dispute, which previously impacted gold prices, is now seen as less influential due to growing hopes of a timely compromise. Commerzbank suggests that the US Federal Reserve has likely concluded its rate hike cycle, providing support and limiting further downside potential for gold prices.

Gold Price Movement and Factors Influencing It
Gold prices have staged a recovery after touching their lowest level since April. A modest pullback of the US dollar from a two-month high has lent support to the XAU/USD (gold-dollar) currency pair. The market expects a longer period of higher interest rates by the Federal Reserve, and this, along with optimism surrounding the resolution of the US debt ceiling, should limit losses for the US dollar. Traders eagerly await Fed Chair Jerome Powell’s upcoming speech, which could provide fresh direction for gold prices.

Factors Influencing Gold Price Movement
The recent recovery in gold prices can be attributed to a modest downtick in the US dollar. Investors anticipate that the Federal Reserve will maintain higher interest rates for an extended period. However, a combination of factors, such as the US debt ceiling resolution and a risk-on sentiment in equity markets, may cap gains for gold. Traders are cautious ahead of Powell’s speech, as it may shed light on the future rate hike path and provide a fresh directional impetus for gold prices. The market sentiment is divided, with the CME Group’s FedWatch Tool indicating a possibility of a pause in the rate-hiking cycle at the next Federal Open Market Committee (FOMC) policy meeting in June. A hawkish tone from Powell could lift expectations for another rate hike next month, potentially boosting the US dollar and putting downward pressure on gold prices. However, it’s important to note that the XAU/USD is currently on track for its biggest weekly drop in three and a half months.

Technical Outlook for Gold Price
From a technical standpoint, the recent swing low around the $1,950 region serves as immediate support for gold. Further downward movement could test the 100-day Simple Moving Average (SMA) near the $1,928 zone, with a potential slide towards the psychological support level of $1,900. On the upside, the ongoing recovery is likely to face resistance near the strong horizontal support breakpoint of $1,970-$1,980. This level may hinder the gold price from surpassing the key psychological mark of $2,000. However, if the price manages to break decisively above the $2,011-$2,012 region, it could trigger short-covering and lead to a potential uptrend.

Conclusion: Is It a BUY or SELL Signal for Gold?
Considering the analysis and expert insights, it can be inferred that the current market conditions lean more towards a BUY signal for gold. The robust demand from central banks, a weakening US dollar, and the potential for safe-haven flows during a possible US recession indicate a favorable environment for gold investments. While there may be limited downside potential in the short term, the overall outlook suggests the possibility of gold breaking its all-time high in the future. However, as with any investment, it’s crucial to conduct thorough research, monitor market conditions, and consult with financial advisors to make informed decisions.

Disclaimer: The above analysis is based on market trends and expert opinions at the time of writing. The financial markets are subject to volatility, and prices may fluctuate based on various factors. It is essential to conduct personal research and seek professional advice before making any investment decisions.

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