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According to an analyst, the outlook for gold prices in the future is unfavorable, and investors should consider reducing their positions in assets that track the yellow metal's price action, such as iShares Gold Trust Micro (NYSEARCA:IAUM). The current bullish gold market, driven by psychological factors, is expected to come to an end soon. The fear of a broader financial crisis following regional bank failures and the economic recession following the US Federal Reserve's rate hikes to combat high inflation seems to be overblown.
Although there are signs of a slight slowdown in economic activity, it is not surprising given the rising cost of borrowing. However, it is not reasonable to say that the economy is shrinking significantly. The labor market, the target of the Federal Reserve's policy tightening, continues to add jobs, which is not typical of a slowing economy. While markets fear a broader financial crisis following regional bank failures, no other banking crisis has occurred a month after the collapse of Silicon Valley Bank and Signature Bank (OTC:SBNY). Extensive reassurances from prominent insiders about the stability of the banking system also indicate that fears of a deeper crisis are overblown.
Analysts expect gold prices to fall from the current $2,006 per troy ounce negotiated through Gold Futures – June 23 (GCM3) to reach an estimated target price of $1,779.15 before the end of 2023, determining an 11.3% drop. Given the current bullish gold market's inevitable end, investors should consider reducing their positions in the securities that follow the precious metal.
iShares Gold Trust Micro is a cheaper and simpler way to participate in the gold market compared to investing in physical gold. The fund represents a way to participate in changes in the price of gold through the US stock market, not directly. The iShares Gold Trust Micro implies an expense ratio of 0.09%, suggesting that this investment vehicle is by far the cheapest of its peers. The fund is a valuable tool for achieving portfolio diversification and raising an inflation barrier.
While gold's March 2022 valuation of around $1,955 an ounce was considered reasonable given the prospect of hedging against the historic peak of inflation in June 2022, current valuations, which are higher than a year ago, may not reflect the ongoing disinflation process and are therefore likely to be inappropriate. This creates an overvaluation risk for iShares Gold Trust Micro shares, which are currently trading well above the 200-day simple moving average of $17.87, the 100-day simple moving average of $18.59, and the 50-day simple moving average of $18.99. Shares are also above the middle point of $18.23 of the 52-week range of $16.17 to $20.29.
The foreign exchange, or forex, market is closely linked to the price of gold, as investors often flock to the yellow metal as a safe-haven asset during times of market uncertainty. As the outlook for gold prices turns bearish, the forex market may experience a shift in investor sentiment. Currency pairs such as USD/JPY and USD/CHF, which are traditionally seen as safe-haven currencies, may strengthen against riskier currencies such as AUD and NZD. Additionally, the Federal Reserve's rate hikes aimed at combating high inflation may lead to a stronger dollar, which could further impact the forex market. As such, investors should pay close attention to how the forex market reacts to the bearish outlook for gold and adjust their investment strategies accordingly.