Many commodity analysts have said that gold is struggling as it faces off against significant bullish momentum in the U.S. dollar, which continues to trade near its highest levels in 20-years. The U.S. dollar index last traded at 104.50 points, up 0.41% on the day.
Meanwhile, June gold futures last traded at $1,840.60 an ounce, down 0.71% on the day.
Gold could continue to face strong heads winds as some currency analysts don't expect the trend in the U.S. dollar to change at least before the summer.
Bipan Rai, North America head of FX strategy at CIBC Capital Market, said several factors have aligned to support the U.S. dollar for the next few months.
“The USD will likely remain on solid ground in the coming months. That's primarily because there doesn't appear to be any let-up in the way longend rates are moving, and the macro liquidity picture continues to point to a ‘risk off'backdrop,” he said in a report Thursday. “The Fed is already quite hawkish, and the USD will find support against other currencies where policy settings are slower to adapt, or are outright divergent.”
However, longer-term, Rai said that the U.S. dollar won't be able to maintain its current momentum.
“We still envisage that markets will reassess where the terminal interest rate for the Fed is being priced, which should leave the USD on the defensive a bit as other majors play catch up,” he said.
Looking ahead, currency analysts at Capital Economics expect the U.S. dollar index to have room to rally to 108 in the coming months, representing a 3% gain from current levels.
They noted that not only does the Federal Reserve's aggressive monetary policy plan support the U.S. dollar, but the growing risk of a global economic slowdown is also providing the greenback with solid buying momentum.
“We estimate that even after its rise over the twelve months, the U.S. dollar is only somewhat above its fundamental “fair value,” the analysts said. “We also think that the balance of risks is skewed firmly in favor of the dollar. In the event that the global economy slows even more than our already-downbeat forecasts suggest the greenback would probably rise further as safe haven demand increases, even if the Fed were to ease off on its tightening cycle.”
Capital Economics said that the only thing that could slow down the U.S. dollar would be a pick-up in the global economy and an improved balance between growth and inflation.
“This doesn't appear to be a realistic prospect until 2023 at the earliest,” the analysts said.
Although the U.S. dollar creates a challenging environment for gold, commodity analysts aren't ready to give up on the precious metal just yet. Many analysts have noted that gold continues to hold up fairly well compared to other assets.
While gold is relatively unchanged on the year, the S&P 500 has fallen roughly 17%.
“Several factors justify holding gold for many mainstream investors, which will limit the scale of outflows in the coming months,” said analysts at Metals Focus in a note published Thursday. “Even following the recent sell-offs, equity valuations are still high by historical standards. All these factors should encourage institutional investors to retain their existing gold positions as a hedge against uncertainties. This, in turn, may prevent a heavy sell-off in the gold market.”