Gold prices have been on the rise since April, although prices have been dropping after the US Federal Reserve signalled that it may raise interest rates sooner than expected.
On June 17 (US time), gold futures fell 4.5%, the largest drop in over 10 months.
Despite the current downward trend, the analysts at Fitch Solutions believe that there is more room for upside in the next six months.
This is due to the rising inflation pressuring US treasury real yields, a weak US dollar, as well as new waves of Covid-19 cases around the world.
“In our previous gold forecast we highlighted that rising global inflation would help to support gold prices temporarily, but we now argue that inflation pressures could take longer than previously thought to recede, supporting gold for longer than we initially expected,” notes the team in a June 8 report.
In an email interview with the analysts at Fitch Solutions, the team says that it keeps its medium- to long-term outlook as stated in its June 8 report for now.
On this, the team at Fitch Solutions has kept its 2021 gold price forecast of US$1,780 ($2365.10) per ounce.
Year-to-date (y-t-d), gold prices have averaged around US$1,804 per ounce and are hovering around the US$1,900 mark as at June 8.
“On one hand, we believe prices are likely to face significant resistance at the all-time high of US$2,075 per ounce. On the other hand, there is strong support at the US$1,730 per ounce mark and we believe prices should remain firmly above this level for most of 2H2021,” writes the team.
Looking ahead, inflation looks set to remaining a key driver for gold prices.
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According to Fitch Solutions’ global macro team, the “strong base effects and persistent supply constraints” will maintain inflation above target across many economies in the next few months.
As such, gold prices will remain supported in the near term as the asset is traditionally seen as a hedge against inflation.
Economic data from the US will also “stoke volatility” in gold.
“As an example, a smaller than expected rise in US non-farm payrolls for May provided significant tailwind to gold, with investors expecting the Fed to maintain its dovish tone over the near-term as they continue to focus on the strength of the labour market,” says the team.
In the longer-term, the analysts at Fitch Solutions have kept their gold price forecast of US$1,700 per ounce for the FY2022, as prices will start to weaken in the later part of 2021 and into 2022.
“Bond yields trending higher amidst a continued economic recovery from Covid-19 will reduce the appeal for gold heading into 2022. While gold prices might start 2022 at a higher base than we initially thought due to lingering inflation pressures in 2H2021, central banks could start tightening earlier than planned in this environment, weakening the appeal for gold,” notes the team.
“The main headwind denting gold's appeal in 2022 and beyond will be the easing of inflationary pressures as well as the normalisation of monetary policy (including the slowing momentum of central banks' balance-sheet buying),” it adds.
Beyond 2022, the US Fed will likely embark on a normalisation of monetary policy, which may lower gold prices further.
“Our Macro team forecasts that the Fed will start hiking in 2023 (we discuss risks of a ‘taper tantrum’ below). In addition, macro uncertainty is easing as the pace of vaccination continues to improve, while the 2021-2022 economic outlook is strong,” says the team.
That said, factors including the weakening US dollar will provide some support in terms of gold prices, which means that prices will not return to pre-Covid-19 levels anytime soon.
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Geopolitical uncertainty could also flare up on the back of a number of important elections around the world in the coming quarters, adding more support to gold prices.
Conversely, the rise of cryptocurrencies as a mainstream financial asset could pose downside risks to gold over the long term.
“The rise in interest from large US financial institutions and large corporates such as Tesla is a sign that Bitcoin is gaining legitimacy as a financial asset. Cryptocurrencies, and Bitcoin being the most famous of them, are often seen as an asset similar to gold - being a form of currency and a store of value against FIAT currencies that is easily transferable - which raises the risk that the continued adoption of Bitcoin comes at the expense of gold,” write the analysts.