(Kitco News) Despite this week’s gains, Gold is still likely to fall to $1,650 by the end of the year before the recovery begins, according to Capital Economics’ latest forecast.
“After falling sharply in the second quarter, we believe the gold price is now close to a cyclical low. In addition, the price should pick up a bit in 2023 as markets play a role in the prospect of monetary tightening in the US.” said chief commodities economist at Capital Economics. Caroline Bain.
Since it peaked in March when gold traded above $2,000 an ounce, the precious metal has been retreating, falling about 11%. The decline was driven by a stronger US dollar and the Federal Reserve’s aggressive fight against inflation through its excessive rate hikes.
“The price of gold has fallen by 11% since its recent peak in March. Much of the decline can be attributed firmly to the appreciation of the dollar, as the price of gold in other major currencies has held up much better. real interest rates on US Treasuries also played a role,” Bain said Wednesday.
This week, gold has stabilized after falling to $1,700 an ounce, with prices even trying to climb back to $1,800. At the time of writing, Comex gold futures stood at $1,781.90 in December, down 0.44% on the day.
“Slower economic growth and a decline in the prices of non-energy commodities point to less monetary tightening in the US than investors had expected. In recent weeks, 10-year yields have fallen, US equities have risen and the dollar has bounced back” Bain noted.
Capital Economics predicted a decline in gold prices since March, citing the strong outlook for the US dollar that offset the gains of additional refuges from the war in Ukraine.
“We recently revised our forecasts for US markets. We now expect 10-year Treasury yields to rise slightly to around 3% at the end of 2022 (previously 4%) and 2.75% at the end of 2023, pointing to a higher real yield expectations as well,” Bain added. “Meanwhile, we continue to forecast that the US dollar will appreciate slightly from here as we believe the US economy will hold up better than other advanced economies in Europe and Asia and that interest rate differentials will continue to favor the dollar.”
Due to this macro outlook, the forecast for the remainder of 2022 is still largely negative for gold. But that picture will change in 2023, Bain pointed out.
“There is still great uncertainty about the outlook for the global economy and the impact of the war in Ukraine… For now, however, we expect a further small drop in gold prices to $1,650 an ounce by the end of 2022, before prices start to rise again in 2023,” she said.
In the short term, jewelery demand in India could weaken due to a rise in import duties from 7.5% to 12.5% and a depreciation of the rupee, which would weigh on prices. On the other hand, physical demand from China appears to be recovering, while demand from the Middle East is likely to remain robust in the face of higher global oil prices.
“All in all, we expect demand for gold jewelry to remain broadly unchanged from 2021,” Bain said. “Jewelry demand was subdued in H1 2022, falling 2% year-on-year, according to the World Gold Council. A sharp drop in sales in China due to virus-related lockdowns (which should prove to be a temporary phenomenon) was offset due to strong purchasing in India due to wedding season and festivals. The price drop since April has probably also acted as a stimulus in the price-sensitive Indian market.”
ETF holdings are expected to continue to fall but remain near historically high levels, which will also weigh on the gold price.
On the positive side, central banks continue to add gold to their reserves, especially Turkey and Egypt. “This will be enough to offset the drag on gold from rising US interest rates, dollar appreciation, ETF outflows and sluggish demand for jewelry,” Bain noted.
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