Citigroup has revised its three-month gold price target down to $4,000 per ounce from $4,300, citing heightened market expectations for Federal Reserve rate hikes this year due to the ongoing standoff in the Strait of Hormuz and elevated energy prices.
Analysts including Kenny Hu noted in a Monday report that weak physical demand could further weigh on gold prices. They cautioned that if the blockade of the Strait of Hormuz persists through late summer, a contraction in gold purchases could potentially drive prices as low as $3,500 per ounce. Concurrently, stronger-than-expected U.S. employment data has propelled the U.S. dollar to a near two-month high, adding extra pressure on dollar-denominated gold.
Nevertheless, gold prices rebounded from session lows after former U.S. President Donald Trump stated that both Israel and Iran were willing to pursue an "immediate ceasefire" and that final peace talks were advancing. This news provided some relief to the downside pressure. Spot gold is currently trading around $4,318.07 per ounce, having earlier touched a low of $4,268.39, its weakest level since March 23.
Rate Hike Bets Surge as Strong Dollar Weighs
Robust jobs data served as the immediate catalyst for the sharp rise in rate hike expectations. The U.S. economy added 172,000 jobs last month, exceeding market forecasts and prompting traders to significantly increase bets on a Fed rate hike by year-end.
According to the CME Group's FedWatch tool, the market is now pricing in a 43% probability of a 25-basis-point rate hike in December, a stark increase from just around 14% a month ago. The subsequent strengthening of the U.S. dollar to near two-month highs has further diminished the appeal of gold priced in the currency.
Markets are now awaiting Wednesday's U.S. Consumer Price Index (CPI) data and Thursday's Producer Price Index (PPI) figures for further clues on the Federal Reserve's interest rate trajectory.
Strait of Hormuz Impasse Poses Key Downside Risk
Citigroup analysts highlighted the situation in the Strait of Hormuz as one of the most significant near-term risk factors for gold. The prolonged blockade has driven up energy prices, exacerbating inflationary pressures and reinforcing market expectations that the Fed will maintain its restrictive monetary policy stance.
The analysts noted that if the blockade continues through the end of summer, reduced gold purchases could lead prices to fall toward $3,500 per ounce. "Consequently, near-term risks appear skewed to the downside, and bargain hunting would only be justified with conviction that the situation will not escalate again."
It's worth noting that the emergence of ceasefire expectations has a dual effect. While a potential peace agreement could lower energy-driven inflation risks, thereby easing pressure on central banks to keep rates high, it could also erode demand support for gold as a safe-haven asset.
Long-Term Target Unchanged Amid High Near-Term Risk
Despite the downward revision to its short-term target, Citigroup maintained its 6-to-12-month gold price target of $5,000 per ounce, indicating its long-term view on the precious metal remains unchanged.
"We remain constructive on gold over the long term but believe the risk of investing in the near term is extremely high for investors with short time horizons and without wide stop-losses," the analysts wrote.
This stance implies that Citigroup's bullish thesis for gold remains intact over the medium to long term. However, under the combined pressures of rate hike expectations, a strong U.S. dollar, and geopolitical uncertainty, short-term traders are advised to exercise high caution.
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