The risks to our gold price forecast are to the downside - Capital Economics
Metals

The risks to our gold price forecast are to the downside

Precious Metals Update
Written by Samuel Burman

We expect that the price of gold will trade at around $1,900 per ounce through 2021 as US real yields remain low. That said, we recognise that there are some key downside risks to our forecast. US nominal yields could surge and investors could intensify their selling of safe-haven assets, perhaps because of a faster-than-expected revival in US economic activity.

  • We expect that the price of gold will trade at around $1,900 per ounce through 2021 as US real yields remain low. That said, we recognise that there are some key downside risks to our forecast. US nominal yields could surge and investors could intensify their selling of safe-haven assets, perhaps because of a faster-than-expected revival in US economic activity.
  • The gold price rallied for most of this year owing in large part to the fall in both nominal and real yields, as well as an increase in safe-haven investment demand in the wake of the virus-induced economic slump. However, the gold price has dipped from its August peak as investors rotated out of safe havens into riskier assets on hopes of a vaccine-induced economic boom next year. (See our Precious Metals Update.)
  • Our current gold price forecast is based on our view that US real yields will slip a touch in the year ahead. (See our Global Markets Update.) The adoption of average inflation targeting by the Fed should keep nominal yields grounded, while higher oil prices should lift inflation expectations. Although this could boost the price of gold above $1,900, as it did earlier this year, we think that the main risks to our 2021 gold price forecast lie to the downside for two key reasons.
  • First, US real yields could rise if nominal yields pick up by more than we anticipate, perhaps as a result of a faster-than-expected rebound in US economic activity. The market currently expects US interest rates to remain near zero at least until 2023, but this could be brought forward if inflation persistently overshoots its 2% target and if the unemployment rate falls quickly. Nevertheless, we suspect that any decline in the gold price would be limited as the Fed would almost certainly step in to prevent nominal yields from increasing too much. Indeed, the new average inflation target is an attempt to avoid a repeat of the 2013 ‘taper tantrum’ episode, when nominal yields surged on the back of market-based fears surrounding tighter US monetary policy. (See Chart 1 and our Global Central Bank Watch.)
  • Second, investors could intensify their selling of safe-haven assets, such as gold-backed ETFs. Demand for ETFs soared earlier this year (see Chart 2) on the back of virus-related economic uncertainty. However, it has eased back in recent months in tandem with the pick-up in investor risk appetite. That said, we think that investment demand will remain high by past standards for some time yet. After all, yields are still ultra-low and there is also lingering uncertainty surrounding both the global economic recovery and distribution of coronavirus vaccines.
  • As it stands, we think that persistently low real yields will support the price of gold in 2021. Nonetheless, the price could fall if the US economy bounces back much faster than the market currently expects.

Chart 1: 10Y US TIPS Yield & Gold Price

Chart 2: Gold ETF Holdings & Price

Sources: Refinitiv, Capital Economics

Sources: World Gold Council, Capital Economics


Samuel Burman, Assistant Commodities Economist, samuel.burman@capitaleconomics.com