Gold (GC=F) is trading to the downside Wednesday morning after the precious metal hit nine consecutive intraday record highs. As the March CPI print shows that prices remain elevated above Wall Street expectations, Bank of America Securities Head of Commodities and Derivatives Research Francisco Blanch joins The Morning Brief to discuss gold’s retreat from record highs.

Blanch points to "tremendous" central bank gold buying as well as retail gold buying in China as sources of gold's run-up. While some of this is cyclical, Blanch points to a "real big structural trend" toward increased gold purchases driven by the "major geopolitical fracture" with the West one said and Russia and China on the other. "It's really been central banks not trusting central banks that has been behind the mentality in the gold market," he says. Wednesday's decline, however, could be attributed to the fact that the expectation of interest rate cuts was potentially also accelerating the gold trade, Blanch adds.

Because of Bank of America's expectations of three rate cuts, Blanch says he thinks gold prices will continue to move higher. If the Fed does not initiate a cutting cycle, "I think it will be pretty bad for the gold market," Blanch explains.

Outside of gold, Blanch indicates that commodities such as oil (CL=F, BZ=F) will perform well, topping out at around 95 dollars per barrel in the summer months. Gasoline and diesel prices may move up with oil as well. Copper (HG=F) is also an attractive commodity, Blanch says, with a supply crisis and an evolving structural need for the commodity to support the energy transition and upgrade power grids.

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

Editor’s note: This article was written by Gabriel Roy.

Video Transcript

SEANA SMITH: Let's take a look at the price of gold because you have gold futures have been seeing a lot of movement here in early action, now trading to the downside. And this comes after the precious metal has actually hit nine consecutive trading days of intraday record highs.

Now after today's CPI print showed that prices remain elevated higher than what the Street had been forecasting, traders are now starting to hedge their bets, while the path to rate cuts remains murky. So here to break all this down and more, we want to bring in Francisco Blanch. He is Bank of Bank of America Securities head of commodities and derivatives research.

Francisco, it's great to have you here. So when you take a look at the pricing action that we've seen in gold since this print came in just a bit high-- you have gold retreating just a bit-- what does this give us a sense in just in terms of how the gold bulls are looking at this print, and what this could tell us about future moves?

FRANCISCO BLANCH: Hey, Seana, so thanks for having me. Look, we've seen a tremendous goal buying on the back of central banks. And more recently, there's been retail gold buying in China. But I think here we have to distinguish the kind of temporary cyclical rate factors driving gold here from what's more structural.

And in the case of gold, I think there's a real big structural trend towards more gold purchases driven by the major geopolitical fracture that we have in the world today between US and Europe on the one side and Russia, China on the other. It's really been central banks, not trusting central banks, that has been behind the buy-the-dip mentality in the gold market.

Now, having said that people have gotten maybe a little bit too excited. And the expectation of interest rate cuts was, maybe, adding more longs to the gold trade, which, of course, are retracing today with the inflation print.

That's the story. Inflation prints hotter than expected makes the Fed less likely to cut in June. Why on gold at this stage? There's better alternatives yielding higher returns. And that's, I think, the battle, if you like, that we are seeing every day.

BRAD SMITH: What is the pathway for gold, then, if we don't see the Fed cutting rates until late, late this year, maybe even Q4, or at some point early next year the bulk of those cuts coming?

FRANCISCO BLANCH: Well, for starters, Bank of America, we have three rate cuts penciled in. So we're still calling for a rate cut in June and two more in the second half of the year. So based on that, we think gold prices continue to go higher.

But there is definitely a challenge for gold market if the Fed doesn't cut rates this year, or as some people have claimed if the Fed hikes rates, I think it will be pretty bad for the gold market, in particular for gold positioning.

We've also seen reflection of some of that in the currency markets with eurodollar suddenly softening up towards 109 and quickly reversing that all the way to 107.50 or 107.60 as soon as the inflation print has come out. It's not just gold.

It's also the fact that higher inflation in the US leads to persistently higher interest rates persistently stronger dollar, and therefore makes assets like gold less valuable. So there's a risk on that gold trade. And the risk, of course, as you pointed out, is the Fed doesn't cut or potentially hikes.

SEANA SMITH: And then what would that mean then for prices just in terms of the pressure that we could see? How much pressure could we potentially see?

FRANCISCO BLANCH: Well, I mean, think if the Fed starts to hikes, again, I mean, you could see potentially quite a lot of downside pressure, although I would expect central banks to come in and eventually put a floor in the market.

Central banks are not going to be chasing the gold market higher. They're going to be buying on dips. And remember, here we are looking at the cyclical elements, which are connected to the rates and FX cycle versus the structural elements, which are a lot more driven in our view by the fact that Russian bank-- central bank assets were frozen after the Ukraine war started.

And the fact that we've had some major, major monetary and fiscal policy mistakes for the last three or four years, which led to this inflation wave, And that's left us frankly with very, very wide budgetary deficits that the buyers of those European government bonds and US treasuries are a little worried about. Let's put it mildly. That's the other big issue here at heart.

BRAD SMITH: And then going forward from here, what other commodities then do you like outside of gold?

FRANCISCO BLANCH: So we think oil coming into the summer is going to do well. We think oil into the summer months will kind of top out around 95-plus a barrel. We think gasoline and diesel are going to go along that. So we'll see a firm run up in fuel prices. OPEC has a strong grip on the market.

It's going to be another a bumper travel season, just like we had in the last two or three seasons post-COVID. People want to travel, want to spend money.

And also the other commodity that we really like at this stage is copper. We think the copper supply crisis is here. And we also think that copper is going to rip to around $12,000 per ton into next year.

Now, the copper story is not only cyclical with lower rates potentially, supporting the market higher, and a restocking cycle right, which is really the short-term story. There's also a structural element to copper, which is the energy transition.

Is the need to upgrade the US grid, the European grid, the global grids need to be upgraded to make them friendlier to renewables and to the electrification of everything and to the big wave of electric vehicle sales that started a few years back and will continue over the course of the next five years?

SEANA SMITH: Yeah. The massive run up that we've seen in copper prices already has certainly been astounding to watch. Francisco, before we let you go, going back to what you just said a minute ago about crude and the gains that we could see here going into the summer season, the biggest factor driving the price of crude-- is it demand at this point, or is it supply given the fact that we are seeing the increase in geopolitical tensions?

FRANCISCO BLANCH: Well, I mean, we haven't-- to be clear, we haven't lost any meaningful amount of supply. The geopolitical tensions, interestingly enough, for the first time in a long time have manifested themselves into more demand. Why? Because ships around the world are having to travel longer routes.

They cannot go through the Red Sea. And also, they have to travel faster, because by virtue of having to go into much longer journeys, you have to speed up those ships. And that's a good chunk of the upgrades to global demand growth in the last six months or so, have really come from that. I would say as much as half of the rerating in oil, in incremental oil consumption growth rates has come from that.

There is a cyclical element. And you know, why is the Fed not, maybe, potentially not cutting rates in June. Well, it will be because the economy is doing better, and because inflation is stickier, and things are ultimately stronger. So there is that element of demand.

But I don't think there's a massive kind of supply story building here in terms of supply losses. Now OPEC has definitely convinced over the last three months older members. We've seen Saudi pushing the envelope here and getting other members to contribute reductions in supply in line with the agreements that were made in the month of December when Angola, remember, left the organization with a big splash.

So clearly, the group is coming back together. There's more cohesion. So there's an element there as well on the supply side that is driven by OPEC. So that also, in my mind, kind of limits the upside because the group will likely want to regain some market share if prices do get to $100 a barrel, or maybe a little lower than that.

BRAD SMITH: Francisco Blanch, who is the Bank of America Securities head of commodities and derivatives research, thanks so much for taking the time here with us.

FRANCISCO BLANCH: Thank you.