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Societe Generale sees gold price averaging $2,200 in Q1 2021

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(Kitco News) - The gold market has the potential to move higher through the first quarter of 2021. Still, it could struggle afterward as some normalcy resumes in the global economy and financial markets, according to one French bank.

In a report published last week, analysts at Societe Generale increased their gold price forecast but saw limited gains for the precious metal. The analysts said that they see gold prices averaging $2,200 an ounce in the first quarter of 2021 before easing back as risks start to dissipate.

"We are less constructive on gold as the pandemic dissipates, economies recover, and the overall situation returns to some sort of normalcy," the analyst said.

SocGen said that the critical factor for the gold market and prices remains investors' demand in exchange-traded funds (ETF). The analysts noted that if ETF demand maintained the pace set this past summer, with inflows rising 41% over the next year, prices could push above $3,000 within the next 12 months.

"We do not believe ETFs holdings will increase by 41% in the next 12 months. This would translate into a 1,382 tonne increase, which seems quite unlikely knowing that large asset managers and many retail clients have already increased their gold allocation," the analysts said.

The bank said that it sees ETF demand rising 9.5%, which would push prices above $2,000 an ounce.

With the gold market so dependent on investment demand, the analysts said that a lot will depend on the shape of the economic recovery.

SocGen said that their base case outlook is for an L-shaped recovery, which will keep interest rates low and maintain support for gold.

"This scenario is based on assumptions that the current fiscal and monetary measures will not be capable of averting a new round of global financial and economic crises," the analysts said.

The risk in this scenario is for a broad-market selloff; similar to what happened in March, gold could be caught in the broad-based deleveraging selloff.

However, they added that the more likely outcome is that investors will rotate out of equities as market confidence falls and into gold.

"In the case of an L-shaped recovery, inflows into gold ETFs would maintain this momentum and push prices higher. As we highlight above, if we witness flows of the order of magnitude witnessed in May and beyond, then gold could rally to $3,000/oz," the analysts said.

Another factor that SocGen said could drive gold prices higher is a potential debt crisis caused by the unprecedented capital that has flowed into financial markets.

"With the global economy entering a full-blown recession, the scope for governments to improve their fiscal stance will remain constrained in the next few years. The rising debt levels may not be sustainable, and if a sovereign debt crisis materializes, gold investment will follow," the analysts said.

The most significant downside risk for gold is a stronger-than-expected recovery in the global economy.

"Our upside economic scenario, a symmetrical V-shaped recovery rather than the tilted V, would still be the most bearish for gold as it would ease equity turmoil concerns and dovish monetary policies. As investors begin to liquidate holdings, memories of the 2013 gold price decline would resurface," the analysts said.

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