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Weak economic growth to weigh on gold prices as deflation risks grow - IHS Markit

Kitco News

(Kitco News) -Gold prices are trading at a more than one-week high as growth concerns spark renewed safe-haven demand for the yellow metal; however, one analyst isn’t convinced that the current rally can be sustained.

December gold futures are starting the week with a 1% gain Monday after disappointing economic data in Europe raised recession fears amid a slowing global economy. Although the economic outlook in the U.S. isn’t as dire, the latest economic numbers still point to slower economic activity. December gold futures last traded at $1,529.50 an ounce.

In a telephone interview with Kitco News, KC Chang, precious metals analyst at IHS Markit, said that it will be difficult for gold to maintain its momentum as slower growth increases deflationary risks.

“I think right now a lot of bad news has been priced into the gold market, and in our view there are more downward as to upward price catalysts currently in the gold market,” he said.

The comments come after IHS downgraded its growth forecasts in a report Friday. The analysts noted that the ongoing trade war coupled with disruption in the oil market following an attack on Saudi Arabian oil fields have raised the risks of a recession.

“The risks of a recession have risen because of the escalating trade war and the oil shock. Nevertheless, given the momentum of growth and expected additional stimulus, a recession can probably be avoided,” the analysts said.

IHS is a little more optimistic on the U.S. economy saying that they expect that 2% growth will be sustained for the next few years.

Turning to Europe, the firm expects to see a mild recession in Germany, a protracted economic contraction in Italy and France and Space will see slower growth but should avoid a recession.

Because of the growing deflationary risks, Chang reiterated his call for gold prices to end the year closer to $1,400 an ounce. He added that looser monetary also won’t provide the stimulus for gold that it did earlier in the summer.

Although IHS expects the Federal Reserve will cut rates one more time this year, Chang said that this move is already priced into the gold market.

IHS expectations are in line with market expectations. The CME FedWatch Tool show markets are pricing in only one more rate hike by December.

As for what it will take for gold to get back above its recent six-year highs, Chang said that inflation expectations have to push much higher, which is unlikely.

“Consumer inflation expectations remain well-anchored between 2% and 3%, so that desire to hold gold as an inflation hedge won’t be as strong going forward.

Chang said that he is also not very optimistic on silver as he sees prices falling back below $17 an ounce. Weak economic growth will weigh on the metal’s industrial demand.

“Right now we see silver moving higher as it plays catch up with the gold market, but ultimately I think we can expect to see lower prices by the end of the year,” he said.

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