Some analysts see it rising to $1,950 this year
It’s been a long time since we talked about gold.
The yellow metal faded off many investors’ radar in a downturn that started in the second half of 2020 and has lasted into 2021.
Now it may be back. After stabilizing at about US$1,700 in March, gold has been making a comeback, with spot prices rising to US$1,873.82 an ounce this week.
And some analysts think it has further to go.
UOB Global Economics & Markets Research sees four reasons why gold’s rally has legs.
First, there has been a strong pickup in the traditional demand for jewellery in China, boosted by the improving economy, and this has helped offset a decline in India.
Second, rising prices have stemmed the bleeding from gold ETFs, which saw heavy outflows in the second half of 2020.
The dynamic between gold and long-term yields also appears to have changed, says UOB. The sharp rebound in 10-year U.S. Treasuries last year weighed heavily on gold, but since April bullion has strengthened despite rising yields. “While gold previously ‘feared’ the rise in long-term yield, gold has now embraced [it] as rising inflation expectation increases demand for gold as a inflation hedge,” the strategists said.
John Feeney, of Guardian Gold Australia, told Bloomberg: “It seems inflation fears are finally translating into higher precious metals prices. ETF investors are starting to swing into net-buyers again.”
Finally, Bitcoin’s pain is gold’s gain. The fall in Bitcoin prices from US$60,000 to US$45,000 has resulted in a sharp drop in the Bitcoin vs Gold Ratio, said UOB, from its 35x peak in March to just under 25x now. Today, Bitcoin plunged further to US$38,000.
With the cryptocurrency craze stalling, some of that speculative money may well flow back to gold.
UOB says it’s early days yet to expect a return to US$2,000 plus, but it has upgraded its forecast for gold to hit US$1,900 in the third quarter of this year and US$1,950 in the fourth quarter and early 2022. That’s up from an earlier forecast of US$1,750 in Q3 and US$1,800 in Q4.
Not everybody, however, is sold on gold. Capital Economics believes the pull-back in real yields of long-dated Treasuries that has boosted bullion will not last and is sticking to its forecast of US$1,600 by the end of the year.
UOB acknowledges that a key risk to gold is the U.S. Federal Reserve. If the Fed takes a hawkish turn it could bring the U.S. dollar roaring back and upset the bullion rally.
Indeed, gold slipped from three-month highs to US$1,861.57 today before the release of the Fed’s minutes from its April meeting. Investors will look to the minutes for any sign the central bank may taper stimulus earlier than expected.
Morgan Stanley expects the first warning of bond tapering to come in September — putting pressure back on gold, Bloomberg reports. Its analysts, though, say bullion has the potential to stay above US$1,700 an ounce through to the end of the year.
Source: FINANCIAL POST