Gold needs to test support but prices can still end the year much higher

Although the Federal Reserve has been cryptic regarding the timing of its easing cycle, the central bank is firm that it is not looking to raise interest rates anymore, which should ultimately be positive for gold, according to one market strategist.

In an interview with Kitco News, George Milling-Stanley, Chief Gold Strategist at State Street Global Advisors, said that the gold market could see some volatility after last week’s monetary policy decision created some confusion in the marketplace.

“[Fed Chair Jerome] Powell did what he always does: try to talk the markets off the extremes. There was some chatter that the Fed could end up hiking rates this year, but he stamped that out immediately,” he said.

Looking at near-term price action, Milling-Stanley said that a continued correction following March’s $400 rally would be healthy for the market.

“We’ve seen a big run-up in gold, so it makes sense that we test the downside and see how strong support will be,” he said. “Is there strong support at $2,300 or maybe at $2,250? We have tested the upside of the extreme, so it makes perfect sense to see where the downside will be.”

So far, the gold market has seen a shallow correction, with initial support holding at $2,300 an ounce. June gold futures last traded at $2,332.50 an ounce, up 1% on the day.

Although gold has now entered a consolidation phase, Milling-Stanley said it is still likely that gold will end the year higher. He pointed out that the Federal Reserve’s stance puts a cap on bond yields, which should keep the U.S. dollar relatively in line.

“There's a very good possibility, given that historically, the kind of macroeconomic and geopolitical background that we're experiencing right now has always been very favorable for gold,” he said. “It would not surprise me to see gold go a good deal higher from where we are.”

Renewed focus on the Federal Reserve’s monetary policy has created some near-term selling pressure in gold, but Milling-Stanley said that he expects interest rates and bond yields will remain secondary factors driving the precious metal’s price action.

He pointed out that historically, interest rates at 5.50% are still relatively low. He added that stubbornly elevated inflation means that real rates are even lower.

“The pressure now is all going to be on the dollar, not on the gold price. I think there will be downward pressure on the dollar, because it's clear [Powell] is not going to raise rates, and if he's not going to raise them, then I think the dollar is likely to suffer.”

Looking past the recent volatility, Milling-Stanley said that gold remains well supported by central bank demand and ongoing geopolitical instability.