Gold's path higher is a bumpy road - TD Securities
Rising optimism in financial markets and deflationary risks are pushing bond yields higher, which is weighing on the gold market; however, there are still reasons to be optimistic on gold prices in the long-term, according to Bart Melek, head of commodity strategy at TD Securities.
In an interview with Kitco News, Melek said that he continues to expect gold prices to push higher through the rest of the year. However, he warned investors that the road to record highs will be bumpy.
Melek said that a firmer U.S. dollar, a short-term demand shock will be headwinds for gold, but he added that investors should look beyond those issues.
“This is going to be one nasty recession and that the economy is going to function massively below potential. And if governments and central banks relied on the normal trends, it would take a decade or so to work off that spare capacity,” he said. “So we're going to need stimulus and that means printing money that means creating debt.”
Melek said that inflation is going to have to move higher as TDS sees the Federal Reserve’s balance sheet increasing to $12 trillion this year.
Although short-term selling pressure pushed gold briefly to a one-month low Wednesday, the price has managed to hold critical support around $1,700 an ounce. Melek said that in the current environment, he could see gold prices fall another $20 to $30 an ounce; however, he also noted that there is monetary policy and fiscal stimulus will ultimately provide significant support to the precious metal.
On the upside, Melek said that $1,800 an ounce could remain a significant resistance point for the rest of the year.
While TDS remains optimistic on gold for the rest of the year, they see even more potential for silver prices. Melek said that in the current environment, silver prices could trade in the $20 an ounce area by the end of the year.
“As COVID-19 impacts start to fade, we will see a return of industrial demand, which is, you know is over 60% of silver demand. That will create a tightness in the physical markets,” he said. “From investment demand… we're going to likely have physical deficits with people unwilling to part with inventories. That is a very good recipe for higher prices.”