(Kitco News) - Gold's struggle to hold support around $4,000 an ounce is testing investor confidence in the precious metal, but one major investment firm remains optimistic that prices can recover to $5,500 by early next year. However, persistent inflation, rising bond yields and a more hawkish Federal Reserve are making that bullish outlook increasingly uncertain.
In its latest Monthly Gold Monitor, State Street Investment Management maintained its forecast for gold prices to trade between $4,750 and $5,500 an ounce by the end of the first quarter of 2027. However, the firm reduced the probability of that scenario to 60%, down from 70%, as higher interest rates and a stronger U.S. dollar continue to weigh on the non-yielding precious metal.
The gold team, led by Aakash Doshi, Head of Gold Strategy at State Street, highlights growing uncertainty surrounding the Federal Reserve's monetary policy outlook, even as structural demand continues to support the broader gold market.
The latest commentary represents a more cautious outlook compared with late September, when Doshi told Kitco News that rising bond yields could push gold prices toward $4,000 an ounce but that the broader bull market remained intact.
At the time, Doshi identified $4,000 as a potential floor for the precious metal and maintained that gold could reach $5,000 by June 2027. Although that longer-term optimism remains intact, State Street's latest report suggests the market faces a more challenging path toward those higher prices.
The firm now assigns a 35% probability to its bearish scenario, which would see gold remain within a range of $4,000 to $4,750 over the next six to nine months.
State Street noted that gold prices fell 6.3% in September as the Federal Reserve raised interest rates by 25 basis points and investors began pricing in further monetary tightening.
According to the report, money markets have dramatically repriced the Federal Reserve's interest-rate trajectory. At the end of August, markets expected only 1.5 quarter-point rate hikes through June 2027. Following September's policy decision, expectations shifted toward an additional 3.3 hikes over the following nine months.
According to the FedWatch Tool, markets are expecting the Federal Reserve to keep interest rates unchanged later this week; however, markets see a more than 80% chance of a rate hike in December. Markets are also pricing in further rate hikes in the first quarter of 2027.
The market’s shift in interest rate expectations and the resulting rise in Treasury yields helped push the U.S. dollar to a two-month high, increasing the opportunity cost of holding gold.
Despite those headwinds, the investment bank said the precious metal has demonstrated surprising resilience, particularly as investment demand remains relatively healthy.
U.S.-listed gold-backed exchange-traded funds attracted $11.7 billion in inflows during the third quarter, including $3.7 billion in September, even as prices declined. The inflows more than offset the $5.6 billion withdrawn during the second quarter.
“In our view, this suggests ongoing strategic investor allocations utilizing gold as a monetary hedge, alternative-fiat asset, and portfolio diversifier,” the analysts said.
The report also highlights growing concerns that the Federal Reserve could make another policy mistake by overestimating the economic benefits of artificial intelligence.
State Street warned that the central bank may be assuming that AI-driven productivity gains will allow the U.S. economy to withstand restrictive monetary policy for longer than it otherwise could.
If those productivity gains fail to materialize quickly enough, higher borrowing costs could create significant problems for consumers, businesses and the federal government.
The firm noted that the Federal Reserve does not expect core inflation to return to its 2% target until 2029, potentially leaving policymakers with little room to ease monetary policy if economic growth begins to deteriorate.
Such a scenario could create stagflationary conditions, with persistent inflation accompanied by weakening economic activity.
State Street said this environment could ultimately reinforce gold's appeal as a store of value and a hedge against monetary policy uncertainty.
Meanwhile, the firm's technical outlook reinforces the importance of the $4,000 level.
According to the report, gold ended September below its 50-day moving average of approximately $4,322 and its 200-day moving average near $4,539. Both levels represent potential resistance during any sustained recovery.
The firm also identified initial technical support around $4,121, followed by the psychologically important $4,000 level. A sustained move below those levels would increase the risk of a deeper correction, while a recovery above $4,231 would provide an initial signal that selling pressure is beginning to ease.
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