Gold to end the year at $1900 supported by lower real yields – Capital Economics

The gold price has risen by nearly 20% this year, as real yields have fallen. Strategists at Capital Economics have become more positive on the outlook for the yellow metal price as they think the backdrop will remain supportive, limiting any downside, even if some of the steam comes out of the gold price rally next year.

Key quotes

“We have raised our forecast for the gold price, as we expect real yields to drift a little lower and remain low for some time. We now think that the price of gold will finish the year at $1,900 per ounce ($1,600 previously) and will remain elevated over the next couple of years.”

“In the near-term, we reckon that inflation breakevens will drift higher, back to pre-pandemic levels, as economies recover from their lockdown-induced slumps. And although we expect nominal 10-year Treasury yields to inch up too, they will not rise by as much. The net effect of these moves will be to drag real yields lower by end-2020. As a result, we expect the gold price to push a little higher by year-end. This view is supported by our forecast that the US dollar will weaken in the second half of 2020.”

“We think there could be clusters of investors – concerned about the potential for runaway inflation owing to ultra-loose monetary policy – who will seek refuge in the gold market. In the near-term, weak demand should hold back the inflationary effects of supply constraints and policy stimulus. And in the medium-term, we think that firms are more likely to shore up their balance sheets than embark on an inflationary spending spree. As such, demand for inflation hedges should fade.”