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Gold's Luck Has Run Out, Prices To Fall To $1,100 By Year-End - Capital Economics

Kitco News

(Kitco News) - One firm sees gold falling 11% by the end of the year as further aggressive Federal Reserve interest rate hikes weigh on the market.

According to Simona Gambarini, commodity economist at Capital Economics, gold’s luck has run out as prices continue to fall in the wake of the Federal Reserve’s decision to raise interest rates by 25-basis points and signal further monetary policy tightening. In a recent report, she noted that because of the current interest rate environment, her firm is forecasting gold to end the year at around $1,100 an ounce, a drop of more than 11% from current future prices at $1,2450 an ounce

“There doesn’t seem to be any fundamental reason for gold to rally through the rest of the year,” she said in a telephone interview with Kitco News.

Capital Economics is extremely bullish on interest rate expectations as they see two more rate hikes this year. Currently, markets are only pricing in one more rate hike by the end of December.

“Once investors see the Fed is serious about raising rates, you will see markets price in more rate hikes and you will see even more money leave the gold market,” she said.

Not only will interest rate hikes continue to push gold prices down, but Gambarini said that she sees less safe-haven demand supporting the market as geopolitical concerns have started to disappear.

She noted that gold has seen strong safe-haven demand as a result of uncertainty surrounding the Eurozone; however, she noted that so far, two out of three major European elections have seen renewed support for the single economy. The third election, Germany’s later in the fall, is also expected to show support for the Eurozone.

While political turmoil in Washington, surrounding the Trump administration is still a geopolitical wildcard, Gambarini said that it probably won’t be enough to curtail gold’s current downtrend.

Gambarini also said that she sees less support for gold from a drop in equity markets. While traditionally a correction in equity markets would be good for gold, she said that market fundamentals are slightly different.

“If equities sold off because the U.S. slipped into a recession then that would be good for gold; however, a selloff now would only be viewed as a correction of an overvalued market. I don’t think there would be much panic if equity prices dropped from these over-extended levels,” she said.

The one bright spot for the gold market this year has been renewed physical demand in two of the biggest markets in the world: China and India. However, Gambarini said that this also won’t be enough to stop gold’s slide.

“While imports into China and India have improved, they are up from extremely low levels seen last year,” she said. “The physical market isn’t going to provide much support for gold as this selloff is being drive by speculators and we see more selling to come.”

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