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Gold price still has some upside potential but not a lot - Natixis

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(Kitco News) - The gold market is struggling to find momentum after hitting an all-time high in August and according to one financial analyst, gold prices have room to push modestly higher in the near-term and into year end.

In a report published Monday, analyst at Natixis said that they could see gold prices ending the year in a range between $1,920 and $1,950 an ounce, a gain of nearly 2% from current prices. December gold futures last traded at $1,915 an ounce, up 1% on the day.

In an recent interview with Kitco News, Bernard Dahdah, precious metals analyst for the French Bank and one of the authors of the latest report, said that the ongoing uncertainty surrounding the global economy due to the spreading COVID-19 pandemic may not push gold prices back to $2,000 an ounce but will at least continue to provide some support against a major selloff.

“With everything that is happening I think there are more upside risks to gold,” he said.

“Our econometric model suggests that the price of gold now seems slightly undervalued following the correction underway since 7 August,” the report said.

Dahdah said that a lot of factors like a weaker U.S. dollar and lower interest rates have been priced into the gold market. He added that the market needs something new.

“For gold to go higher it needs more liquidity,” he said. “This liquidity is what will drive interest rates lower and push gold prices higher.”

While analysts and investors are expecting inflation pressures to push real yields lower, Dahdah said that he is more focused on where nominal yields are going. He added that he doesn’t see the risk of hyperinflation anytime soon.

A lack of inflation will keep real yields tethered and gold prices chained, he said.

“For us to see higher inflation or hyperinflation we need to see central bank liquidity pumped into consumer credit markets. But that is not where the money is going.” he said. “But right now in our modern economy, central banks are increasing their balance sheets but the money is going into real estate and equity markets. It not going to the consumer.”

According to the Dahdah’s latest report, gold prices going above $2,000 an ounce in 2021 is a worst case scenario where a second wave of the Coronavirus cripples the global economy that would force central bank to pump in as much liquidity as they did in March and June, during the first wave of the pandemic.

“In this worst case scenario… the10-year T-Note heads towards 0.4%; the U.S. heads into a temporary deflation in 2021 and the DXY heads towards 96,” he said. “Then the model suggests that [gold] prices could reach $2,100/oz.”

While gold prices have potential to move modestly higher through the end of the year, looking ahead, Dahdah’s base case scenario calls for gold to fall to $1,750 or even $1,700 in 2021.

“Despite the additional liquidity provided by central banks. The normalization of gold ETFs and the expected slight rise in US long-term interest rates are likely to more than offset the expected depreciation of the DXY and the liquidity factor,” Dahdah said in the report.

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