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New high scenario for gold sees prices approach $1,900 next year - RBC Capital Markets

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(Kitco News) For the gold market, it might be more about keeping this spring’s price gains than hitting new record highs, according to RBC Capital Markets commodity strategist Christopher Louney. 

“While some have pushed their base case gold forecasts to ever-loftier heights, we think that gold’s prospects are more about persistent buoyancy than further record price gains, at least unless deeper trouble materializes,” Louney wrote in a report published last week. “An impressive rally into the $1,700’s and sustainable strength around that range is one thing, but surpassing all-time quarterly highs by a wide margin is entirely different.”

The report updates the bank’s 2020 and 2021 average price projections for the yellow metal, citing “staggering economic impact of COVID-19 as well as the human toll it has exacted.”

RBC breaks it down into two outlooks: the base case and the high scenario. 

In the base case scenario, Louney sees Q4 as the strongest quarter for the gold market this year. “Our new base case (50% probability) represents a $102/oz increase to $1663/oz in 2020, with Q4 being the strongest quarter in 2020, followed by 2021 which has undergone a significant quarterly revision, even if the annual average has only moved slightly,” he said.

In comparison, the high scenario “has a 40% probability and includes quarters that would surpass previous quarterly average records by a wide margin in Q4 2020 and again in Q1 2021 in dollar terms.”

Gold price in the high scenario have been updated from $1,614/oz to $1,788/oz in 2020 and from $1,700 to $1,893 in 2021. The high scenario “assumes a far slower than expected recovery and perhaps a deeper economic stumble, of which there is certainly a non-zero chance in our view. We are not prepared to call for this in our base case given what we know so far,” Louney noted.

It is certain that higher prices are here to stay for the time being, but it is unclear how much room this rally has on the upside. 

“Prior to this year’s massive shifts, we had already expected uncertainty to drive additional allocations, for lofty ETP holdings to notch additional gains, and for sentiment to carry the day. With all of those factors intensified by the crisis, elevated prices that manage to overtake quarterly average records seem likely, but surpassing all-time quarterly records by a wide margin resides in our high scenario, not our base case,” Louney explained.

A major element working in favor of gold is the global monetary and fiscal action. “The same policies that are meant to stimulate economic growth are simultaneously stimulating gold too, but from a different angle,” Louney wrote. 

RBC pointed out that gold can continue to make gains even as equities improve with investors still seeking the safety of gold as they come back to the stock market. 

“We see elevated gold prices through the end of this year and spilling over into much of 2021 as well. It is probably no surprise that the consumer seems to have evaporated from our balances given high prices and closed retail outlets, meanwhile, investor demand (i.e. ETPs) continues to carry the day. That theme carries throughout our forecast horizon for the most part, particularly in both our high scenario and our base case,” Louney added. 

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