Precious metals investors need to prepare for lower gold prices in the next few months, with things only picking up next year when gold rallies to $1,350 an ounce, according to Capital Economics.
Gold continues to sulk in the summer months, trading near 12-month lows, with strong U.S. dollar and lack of major fundamental news keeping the metal under pressure. As Asian markets opened on Tuesday, spot gold on Kitco.com was trading at $1,221,20, up 0.02% on the day, while August Comex gold futures were last seen at $1,220.50, down 0.07% on the day.
But, with higher greenback taken out of the equation, gold prices could be trading at a much higher level, commodity economists at Capital Economics noted.
“The dollar has also been the biggest driver of gold prices. Indeed, our consumption weighted gold price suggests that if we stripped out the dollar effect, the price of gold would be much higher,” economists wrote. “Given that we don’t expect the dollar to fall back until 2019, when slower growth in the U.S. will prompt the Federal Reserve to bring the tightening cycle to an end, gold prices are likely to remain under pressure over the coming months.”
The only positive drivers that could surprise investors on the upside are safe-haven demand and inflation expectations. But, both have been falling short lately, added Capital Economics.
“Safe-haven demand for gold has so far been elusive and U.S. inflation expectations have moved sideways over the past few months. What’s more, demand from key emerging markets is likely to fall as a stronger dollar is making gold in local currency terms more expensive,” they wrote.
This outlook has forced Capital Economics to revise down its year-end gold price outlook to $1,200 an ounce from $1,300. It is even lower than today’s price of $1,221.
But, the firm’s medium-term outlook for gold prices is actually better than previous estimates. Capital Economics highlighted that the Fed’s tightening cycle will end in the first half of 2019, which will lead to higher gold prices.
“As the Fed tightening cycle comes to an end in H1 2019, investors will start to factor in lower rates ahead, which should push the gold price up to $1,350 by end-2019,” economists said.