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Can Gold Hit $1,500 an Ounce This Year?

Commentaries & Views

The price of gold snapped above $1,340 an ounce on Tuesday for the first time since May, extending a rally that began in the December quarter on heightened stock volatility and fears of additional U.S. rate hikes. Ever since Federal Reserve Chair Jerome Powell indicated that he would be “patient and flexible” with further monetary tightening, though, the yellow metal has been posting some solid multi-session gains. Gold miners, as measured by the NYSE Arca Gold Miners Index, have also stepped into overdrive. They’re up more than 26 percent since the start of the fourth quarter. 

So what catalyst could spur the price of gold even higher, perhaps to $1,400 or even $1,500 an ounce?

Sometimes it’s all about monetary policy. Higher nominal rates can make gold look less attractive as an investment since it doesn’t offer a yield. That’s been among the most significant headwinds since the Fed started normalizing rates in late 2015.

But now that there are signs the global economy is stalling—evidenced by the slowdown in manufacturing expansion—it looks more and more likely that we’ve reached maximum monetary tightening.

A growing number of traders, in fact, are betting that rates will stay flat or actually be trimmed by the end of this year. Data from the CME Group’s FedWatch Tool shows that around three quarters of traders believe rates will stay within the 2.25 percent to 2.50 percent range by December. Meanwhile, 13 percent think rates will be lowered to between 1.75 percent and 2.00 percent. An even greater share, nearly 20 percent, sees rates falling in that range by January 2020.

the U.S. may have reached maximum monetary tightness

The market’s perception that rates are going nowhere but down in the near term is undoubtedly a contributor to higher gold prices right now.

The real catalyst, however, would be if we start to see another meaningful pickup in inflation. Inflation, as you know, acts like erosion, reducing the value of your cash and government bond yields. It’s times like this when investors have especially favored gold, as it has an excellent track record for holding its value. In the past, when the rate of inflation was higher than the yield on the five-year Treasury, the price of gold caught a major tailwind.

In July of last year, the consumer price index (CPI) advanced just under 3 percent year-over-year, its fastest pace since January 2012. Although it’s receded somewhat since then, it’s important to keep in mind that the U.S. and China are still involved in a trade dispute, despite high-level talks currently taking place. Tariffs are essentially taxes that have the effect of raising the price of consumer goods. The longer the dispute lasts, the likelier it will be that inflation will heat up.

All of which should benefit gold bullion and, as a result, gold stocks.

So will gold hit $1,500 an ounce this year? No one knows for sure, of course, but suffice it to say that all the conditions appear to be in place right now.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.