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A Perfect Storm Is Brewing That Will Push Gold To $1,400 - Capital Economics

Kitco News

(Kitco News) - A weak U.S. dollar, falling bond yields and struggling equity markets are creating the perfect storm that will eventually drive gold prices to $1,400 an ounce, according to one research firm.

In a report Wednesday, commodity analysts at Capital Economics reaffirmed their year-end target for gold as the market continues to benefit from shifting investor sentiment. Although off their more-than three-month high, gold prices are holding on to considerable gains, up nearly 4% in the last five sessions; August gold futures last traded at $1,333.80 an ounce, up 0.38% on the day.

“We have long expected the gold price to pick up strongly in 2019, largely because we thought a slowing U.S. economy would prompt the Fed to loosen monetary policy and that risky assets, including equities, would fall sharply,” the analysts said.

The analysts said that a weaker U.S. dollar was the spark that lit the fuse for gold’s latest rally; at the same time, the U.K. firm expects the move higher to be sustained by weaker global equity markets.

“Over the past four steep declines in the S&P 500 which saw the index drop by around 15% (roughly the size of the decline we expect this year) the price of gold has rallied by over 5% on average,” the analysts said. “With this in mind, we expect the price of gold to end 2019 at $1,400 per ounce, which is consistent with our end-year forecast of 2,300 for the S&P 500.”

Along with a weaker U.S. dollar, expectations for aggressive interest rate cuts from the Federal Reserve are also helping to drive gold prices higher; however, Capital Economics said that it thinks that market expectations are excessive. The CME FedWatch Tool shows that markets are pricing in a 75% chance that the first rate cut comes by July. Markets also see the possibility of three rate cuts by the end of the year.

“Admittedly, we don’t expect an additional fall in rate expectations and we only anticipate 75bps of rate cuts by the Fed over the next two years, rather than the 100bps now priced into markets. However, we do not think that the dollar will appreciate much from here either,” the analysts said.

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