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(Kitco News) – Gold Market Shows Discount to Fair Value; However, as long as the Federal Reserve continues to tighten monetary policy aggressively, investors should stay on the sidelines, according to a market analyst.
In an interview with Kitco News, Huw Roberts, head of analysis at Quant Insight, said that while gold looks cheap relative to its fair value, macro conditions don’t support a new uptrend any time soon. .
He added that based on QI’s modeling, the fair value of gold should be around $1,791 an ounce. The comments come as gold struggles to find further bullish momentum even as it holds long-term support above $1,730 an ounce. August gold futures last traded at $1,734.60 an ounce, down 0.41% on the day.
Roberts explained that QI assesses the fair value model of gold based on, in very general terms, economic growth, inflation, financial conditions, including real yields, the yield curve and credit spreads, monetary policy environment and risk appetite.
Roberts added that QI models show that macro fundamentals are collapsing for gold, which could point to further near-term weakness. He said investors using QI modeling are waiting for the macroeconomic picture to at least stabilize before buying the current dip.
“Although the pattern shows that gold is cheap, we don’t have a strong buy signal at the moment,” he said. “From a pure IQ perspective. We want the value of the macro model to increase.”
As for what could reverse gold’s trend, Roberts said the model suggests there must be a change in the interest rate trend. Roberts noted that they highlighted 16 factors that can influence the price of gold; however, the most important factor fueling the market remains inflation. Inflation accounts for more than 18% of the fair value of gold, according to a study by QI.
Although inflation is at its highest level in 40 years, real yields are rising. At the same time, breakevens, the difference between nominal and real returns, are falling as fears of recession increase.
“The break-even points are falling, as the market worries about a recession and lower inflation and until those factors turn around or stabilize, then the value of our model is not going to stabilize,” he said.
Recession fears have increased in recent days as the market braces for another extraordinary rate hike from the Federal Reserve. Markets expect the US central bank to raise the federal funds rate another 75 basis points at the end of the month.
But it’s not just gold that has fallen below its fair value. Roberts said silver might be a slightly more attractive asset to watch in the short term.
According to QI modeling, silver is about half a standard deviation below its fair value, more than gold but still not enough to trigger a buy signal. Roberts said he monitors assets at least one standard deviation from fair value.
QI’s modeling sees silver prices around 7% below fair value. Silver saw a much bigger decline than gold. The gold/silver ratio is currently at its highest level in two years at 90.58 points. September silver futures last traded at $19.155 an ounce, down 0.42% on the day.
What makes silver slightly more exciting than gold is that the IQ pattern shows that the metal’s macro fundamentals appear to be bottoming out and rising.
“It’s still early days, and we wouldn’t be excited until the macro picture hits a new high confirming a low, but silver is an asset to watch,” he said.
The asset Quant Insights is watching closely is copper. The industrial metal took a significant bruise as recession fears grew. Slower economic growth would lead to lower demand for copper. Copper prices are trading roughly at a 1.5-year low below $3.50 per pound.
Roberts said that based on QI’s modeling, copper is four standard deviations from fair value. He added that the copper market has only been oversold four times in the past 14.5 years.
“If we’re not at the bottom, we’re probably pretty close,” he said.
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