Gold is expected to see more downside despite recession fears and the US Federal Reserve's decision to hike interest rates, according to an analyst.

The precious metal inched down on Friday as the US dollar strengthened. It had previously rose on Wednesday, when the Fed Reserve delivered another round of increase.

The Fed opted for a 0.25% interest rate hike this week, indicating a slower pace of rate adjustments amid concerns about the stability of the financial sector.

The move is seen as the Fed's way of striking a balance between taming inflation, curbing unemployment and stabilising the "rattled banking sector", according to Srijan Katyal, Global Head of Strategy and Trading Services at ADSS.

The bullion has always been seen as a safe haven in times of uncertainty. Gold prices rallied as much as 1.7% in the immediate aftermath of the Fed's decision, approaching once again the $2,000 level.

While the recent turbulence in the banking sector has put investors on edge, a financial crisis and a rapid reversal in the US monetary policy are not likely to happen, according to Carsten Menke, Head of Next Generation Research at Julius Baer.

"Hence, we believe gold has rallied too fast too far, and we see more downside than upside going forward," Menke said in a note on Friday.

"We see the issues at the regional US bank as idiosyncratic and do not expect that they will spread and trigger another financial crisis. Even though the issues at the US banks are a consequence of the rapid increase in US interest rates, we do not see the necessity for a rapid reversal in US monetary policy as it is priced in by money markets."

Menke said that while some safe-haven seekers have returned, a "broad-based flight into safety" is not likely to happen, unless the outlook for the US economy deteriorates markedly.

"Ultimately, the outlook for gold remains very much tied to the risk of a recession, which remains rather muted in our view."

Prices are still elevated

However, for those who do not share the view and opt to seek shelter, Menke said it's still a good option to bet on gold over silver. "Gold is the ultimate safe-haven asset and, in case of a crisis, should benefit from a broad-based flight to safety and strengthening investment demand."

However, according to John Reade, Chief Market Strategist at the World Gold Council, the Fed's recent decision highlights that the central bank still has concerns about contagion in the banking sector. This, he said, could further dampen investor confidence.

"In a bearish market when investors' appetite for risk is low, gold's safe haven characteristics and strong track record of maintaining value through the cycle really come to the fore," Reade said in a separate note.

Reade said that the recent banking crisis has worked in favour of gold. While the US Treasury Yields have posted significant declines, there has been safe-haven buying in ETFs and physical gold in North America and Europe.

"While we've seen the price of gold pull back slightly from its 2023 high last week, the price remains elevated both year-to-date and in the context of the past twelve months, which suggests that investors are balancing their portfolios away from riskier assets," Reade pointed out.

(Reporting by Cleofe Maceda; editing by Anoop Menon)