- Gold powers to an all-time high
- The stars are aligned for gold prices to continue to rise
- A lower dollar, aggressive monetary policy easing, ultra-low interest rates, negative US real yields, fiscal stimulus and the technical outlook all support gold prices
- Nonetheless, positioning does remain extreme which could encourage volatility
Introduction – Will gold break records?
On 9 July we released our Gold Watch – Gold gains from global stimulus measures. In this report we revised our gold price forecasts because the crucial technical resistance at USD 1,800 per ounce was taken out. Today the all-time high at USD 1,921 from 6 September 2011 was taken out. What do we expect going forward?
Stars aligned for gold price rises
The stars are aligned for gold prices and a test of the psychological level of USD 2,000 is within reach now. There are several reasons for this.
Firstly, since the start of July the US dollar has declined. For a start a more constructive sentiment on financial markets has resulted in lower safe haven demand for the dollar. In addition, investors shy away from the dollar because of the tensions between the US and China and the Presidential elections. Moreover, the handling of the COVID-19 situation in the US has weighed on the US dollar. Finally, the monetary policy easing by the Fed is a crucial driver of dollar weakness.
Secondly, central bank policy is a strong driver behind higher gold prices. Official rates are close to zero in a large number of countries and they will unlikely go up in our forecast horizon. Moreover, most central banks have announced quantitative easing. The Fed has embarked on unlimited QE and the BoJ and the ECB also have large QE programs. This sounds like music to the ears of gold bugs as money floods into the market and currencies begin to decline.
Thirdly, in a number of countries there are negative rates (official and/or government bond rates). Gold is not paying any interest rates. So negative rates are another major support to gold prices especially versus the euro.
Fourthly, the US may not have negative official rates or government bond yields, but nominal rates corrected for inflation expectations (real rates) are in negative territory. As long as there are expectations that the Fed would move to a form of yield curve control, the upside in US Treasury yields is limited. So, if investors are concerned about inflation in the longer run this will be visible in inflation expectations and negative US real yields. As the graph below on the right shows, this has been a major support to gold prices. Our US economist expects relatively stable US Treasury yields and no pick-up in inflation, because of the negative effect of the pandemic on the economy. So, we think that this driver should have less impact going forward.
Fifthly, governments have embarked on large-scale fiscal stimulus to support the economy. As a result, fiscal deficits in a large number of countries have risen substantially, even to double digit numbers. This development has made some investors nervous, especially in combination with the substantial amount of monetary policy stimulus. As a result, investors have bought gold. Investors are concerned about the possibility of higher the inflation in the future. We are not concerned about this though.
Finally, the technical outlook is positive. Investors saw every dip in gold prices as a buying opportunity. Now the psychological resistance of USD 1,800 per ounce has been surpassed and the all-time high at USD 1,921 has been taken out. Above that the important psychological level of USD 2,000 per ounce is within reach.
Bullish outlook but … potential volatility due to positioning
We recognise that the stars are still aligned for gold prices and therefore the momentum is very positive. But we are also concerned about positioning. Speculators temporary reduced positions, but other investors have continued buying. Speculative positions are substantial and positions in ETFs are at an all-time high. If investor sentiment deteriorates, some of these positions will likely be closed. This will cause higher volatility in gold prices. We still expect a sizeable correction in gold prices in a risk off environment when the dollar is back in favour. It is likely that this correction will be short-lived and be a buy-on-dips for investors eagerly waiting to step in. After such a correction prices could rally again. It is likely that gold prices will test USD 2,000 per ounce in the near-term. But we still expect some profit taking after that. So, we keep our gold price forecasts unchanged.