Despite the recent falls in the prices of precious metals, we still expect the gold price to edge higher over the coming year as US real yields drift a little lower.
- Despite the recent falls in the prices of precious metals, we still expect the gold price to edge higher over the coming year as US real yields drift a little lower.
- The gold price surged from March to early August owing to the plunge in US real yields, as measured by Treasury Inflation Protected Securities (TIPS). (See Chart 1.) As gold pays no income of its own, its attractiveness as an asset is determined by real yields on competing safe-haven assets, such as US Treasuries. Real yields have plummeted in recent months as a result of the collapse in nominal yields and a revival in inflation expectations. (See Chart 2.)
- However, since September, the gold price has fallen to below $1,900 per ounce on the back of a somewhat stronger US dollar. (See Chart 3.) Nevertheless, we think that the price of gold will drift upwards through to the end of 2021 as real yields edge lower, which could weigh on the value of the US dollar.
- The Fed has already stated that it will keep monetary policy ultra-loose until at least 2023 and that it would allow inflation to overshoot its target. (See our US Economic Update.) As such, we expect that the nominal yield on US 10-year Treasuries will fall from around 0.70% currently to 0.50% by the end of this year and remain at this level until at least 2022. This fall, in conjunction with higher inflation expectations as the US economy recovers, will mean that real yields will decline.
- What’s more, retail investment demand for gold-backed ETFs, such as SPDR Gold Shares ETF (the world’s largest gold-backed ETF), is currently extremely high. (See Chart 4.) And, if COVID-19 is not brought under control soon, ETF demand could rise further which would provide an additional boost to the price of gold.
- All told, further falls in real yields in the coming year are set to lift the price of gold. As such, we forecast that the gold price will rise to $2,000 and $2,100 per ounce by end-2020 and end-2021, respectively.
Chart 1: Gold Price & 10Y US TIPS Yield (2020)
Chart 2: US Treasury Yields & Inflation Breakeven (%)
Chart 3: US Dollar Index & Gold Price (2020)
Chart 4: SPDR Gold Shares ETF Holdings & Gold Price
Sources: Refinitiv, Capital Economics
Samuel Burman, Assistant Commodities Economist, firstname.lastname@example.org