Gold unlikely to fall much further - Capital Economics
Metals

Gold unlikely to fall much further

Precious Metals Update
Written by Adam Hoyes

While we are revising down our forecast, we don’t expect the price of gold to fall that much further this year. In our view, the recent decline in investment demand is unlikely to continue for long. What’s more, we think the ongoing recovery in physical demand will prevent the gold price falling too far.

  • While we are revising down our forecast, we don’t expect the price of gold to fall that much further this year. In our view, the recent decline in investment demand is unlikely to continue for long. What’s more, we think the ongoing recovery in physical demand will prevent the gold price falling too far.
  • The main driver of the recent fall in the gold price has been a slump in investment demand, primarily due to rising US real yields. (See Chart 1.) The yield on 10-year Treasury Inflation Protected Securities (TIPS) has jumped from about -1% on 15th February to -0.70% now – its highest since June. With higher yields available on safe-haven assets, gold is relatively less attractive to investors. Accordingly, investors are reducing their holdings. In fact, gold ETF holdings are falling at the fastest rate since 2013. (See Chart 2.)
  • However, we doubt that the recent rise in US real yields will continue, and we wouldn’t be surprised if they even edged back down a little. (See here.) If we are correct, then the recent slump in investment demand should subside before long, helping to remove much of the downward pressure on gold.
  • Moreover, we don’t think there’s much potential for rising risk appetite to reduce investment demand further. A lot of good news already appears to be embedded into financial markets and, in our view, the scope for further large increases in investor risk appetite is probably quite limited. (See here.)
  • Meanwhile, we still expect the recovery in physical demand for gold to continue. As we explained in a recent Update, a strong economic recovery in India and a revival in demand in China should act as a floor for the gold price. Recent data have corroborated this view. Gold imports have remained strong in India (see Chart 3), while the timeliest data suggest that demand in China is close to normal levels. (See Chart 4.)
  • In sum, while we are revising down our forecast, we don’t think that the price of gold will drop too much further from here. We forecast it will end the year close to $1600 per ounce.

Chart 1: Gold Price & US 10-Year TIPS Yield

Chart 2: Change in Total Known ETF Holdings of Gold (100-Day Rolling Average, Th. Troy Ounces)

Chart 3: India Gold Imports

Chart 4: Shanghai Gold Exchange Withdrawals (Tonnes)

Sources: Refinitiv, Bloomberg, SGE, Capital Economics


Adam Hoyes, Assistant Economist, adam.hoyes@capitaleconomics.com