PETALING JAYA: Gold prices are set for more gains in the coming months, spurred by rising inflation pressure on US treasury yields, a weak dollar and new Covid-19 waves globally, but likely temporary as prices will trend lower on a six-to-12-month horizon and average lower in 2022 given expectations for real bond yields to rise as the economic recovery remains in play and inflation eases, according to Fitch Solutions.
“We now argue that inflation pressures could take longer than previously thought to recede, supporting gold for longer than we initially expected,” it said in a report.
For now, the research arm of Fitch Ratings maintained its 2021 gold price forecast of US$1,780/oz, with prices having averaged US$1,804/oz in the year to date and hovering around US$1,900/oz at the time of writing.
On one hand, it believes prices are likely to face significant resistance at the all-time high of US$2,075/oz. On the other hand, there is strong support at the US$1,730/oz mark and it believes prices should remain firmly above this level for most of H2’21.
In the coming months, it stated that inflation will remain a key driver of gold prices. Fitch expects strong base effects and persistent supply constraints to maintain inflation above target across many economies in the next few months, which would support gold prices in the near term as it is traditionally seen as a hedge against inflation.
Furthermore, economic data from the US will stoke volatility in the commodity, citing a smaller than expected rise in US non-farm payrolls for May provided significant tailwind to gold.
For 2022, the research arm opted to retain its forecast of US$1,700/oz, on the belief that prices will start to decisively weaken towards 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,” it said.
Although the precious metal price might start the year at a higher base than initially expected due to lingering inflation in H2’21, Fitch opined that central banks could start tightening earlier than planned in this environment, weakening the appeal for gold.
It outlined 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.
“Over the longer term, the US Fed will likely embark on a normalisation of monetary policy which will keep gold prices in a downtrend.”
However, it noted the US dollar’s weakening bias could keep a floor under prices in the coming years from returning to pre-pandemic levels anytime soon. In addition, geopolitical uncertainty could also flare up on the back of a number of important elections across the globe over the coming quarters.
For its call, Fitch has identified a persistently higher inflation into 2022 and beyond, which would provide significant tailwinds to gold prices. This scenario could also cause volatility in financial markets and further boost the appeal for safe haven assets including gold.
“The rise of cryptocurrencies as a mainstream financial asset also poses downside risks to gold over the long term, especially as younger retail investors are more likely to place new investments in cryptocurrencies versus gold,” it said.
