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Is $1,600 the new price top for gold in 2020? Capital Economics weighs in on metal's latest price action

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(Kitco News) With gold trading near $1,500 an ounce amid massive market panic, Capital Economics sees more selling ahead for the precious metal while limiting its potential recovery to $1,600 this year.

The commodity markets are “still some way from the bottom,” Capital Economics chief commodities economist Caroline Bain wrote on Friday.

Come Monday, Bain’s predictions already materialized with gold, silver, platinum, and palladium all plunging down as market sell-off intensified even after the Federal Reserve cut rates by 100 basis points in an emergency move on Sunday while also boosting its bond holdings by at least $700 billion.

Following the Fed’s move, several central banks around the world also announced emergency measures

At the time of writing, gold was trying to stage a recovery with April Comex gold futures last trading at 1,509.80, down 0.45% on the day. 

The significant move down in gold this and last week showed that “strong performance in gold markets during times of financial distress is not guaranteed,” Bain noted.

Going forward, Bain is not ruling out more downside price action in gold.

“There are anecdotal reports that, given gold’s highly liquid market, some investors were forced to sell their holdings to cover losses in less liquid assets. The last time that fire sales of a similar scale were observed was during the global financial crisis,” she wrote.

Gold could continue to face stiff resistance and selling pressure until the coronavirus outbreak peaks and starts to slow, the note added.

“Looking ahead, we think that equity markets could continue to fall in the coming weeks, at least until there are signs that the spread of the virus is slowing. This is particularly the case as valuations remain relatively high. Accordingly, gold may fall further in the near term,” Bain said.

The COVID-19 outbreak has now shifted to the U.S. and Europe, while China is looking towards a recovery.

“There are now clear signs that China is past the worst of the virus-related disruption. That said, the economic damage in other large commodity consumers such as the U.S. and Europe looks set to grow markedly over the coming weeks. Therefore, we think that the near-term risks to commodity prices remain firmly to the downside,” Bain stated.

But the long-term outlook on gold, amid this new low-interest rate macro-environment, remains positive, highlighted Bain.

“We are holding on to our forecast of a rise in the gold price to $1,600 per ounce by year-end.”

The $1,600 level is actually an upward revision from $1,400 for Capital Economics, which was expecting lower gold levels at the start of the year. 

“The spread of coronavirus across the globe has led to dramatic downward revisions to our economic growth forecasts for 2020, policy loosening and a slump in equity markets. In this environment, the price of gold should be benefitting from a combination of safe-haven buying (owing to the deteriorating economic outlook and uncertainty) and a significantly lower opportunity cost involved in holding a non-interest-bearing asset like gold,” Bain wrote. 

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