Gold is exactly where it should be, and the downside remains limited - WisdomTree’s Shah

Summary:

WisdomTree’s Nitesh Shah says gold is near fair value with strong support from economic weakness and expected Fed cuts, making a drop below $4,000 unlikely despite volatility.

Although gold has yet to reach October’s all-time highs above $4,360 an ounce, the price is trading close to its fair value, according to one market strategist.

In a recent interview with Kitco News, Nitesh Shah, Head of Commodities & Macroeconomic Research at WisdomTree, said that with so much uncertainty surging through the global economy, it's not surprising that the gold market, despite its volatility, continues to establish higher support levels at each new breakout.

He added that investors waiting for bigger pullbacks will continue to be disappointed, as the precious metal is expected to find solid support from growing economic weakness, which will force the Federal Reserve to cut interest rates next week and through 2026, pushing nominal and real bond yields lower and weakening the U.S. dollar.

Although gold was unable to hold its ground above $4,360 an ounce in October and faced significant profit-taking, the selling pressure has been limited, with support holding above $4,000 an ounce.

After a brief consolidation period, gold continues to hold its ground, building support around $4,200.

“After October’s rally, we have seen a healthy pullback, and I think where we are today is probably where we should be,” he said. “Gold is doing exactly what one would expect it to do in a world with rising government debt and falling interest rates.”

Although many investors have been focused on gold’s upside potential, Shah has spent more time modeling his bear-case scenario.

He noted that there is a risk gold could drop back to $3,800 an ounce, but his modeling suggests that the market remains well supported at that level.

“We can get below $4,000, but it will take a significant effort to get there. One could see it as almost an impossibility,” he said.

In his bearish scenario, Shah said that interest rates would have to rise back to 5%. However, he added that if this were to happen, the U.S. economy would likely fall into a recession, making gold an attractive safe-haven asset.

“You would have to see a scenario where economic activity is so high that interest rates have to go higher and investors don’t see the need for holding gold anymore,” he said. “That just seems impossible right now. Every time gold finds a new support level, we are hit with new uncertainty that sparks another rally.”

In recent days, gold has found new momentum after market expectations shifted dramatically once again. Last month, markets aggressively started pricing out a rate cut in December, but disappointing economic data has now caused the pendulum to swing the other way, with markets now pricing in nearly a 90% chance of a cut.

Shah said that although next week’s monetary policy meeting will be important in setting the tone ahead of the new year, the bigger support for gold remains the uncertainty over who will lead the central bank when Fed Chair Jerome Powell’s term ends in May.

He added that any political pressure affecting the central bank’s independence would be extremely supportive for gold.

Shah also said that any questions surrounding the Federal Reserve’s independence could prompt other central banks to further diversify into gold and away from the U.S. dollar.

Source: kitco

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