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Morgan Stanley sees gold prices below $1,800 by end of 2021

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(Kitco News) - Bearish sentiment is creeping back into the gold market as the price is caught in what appears to be a new $50 range.

Morgan Stanley is staking its bearish flag in the sand as it sees prices falling below $1,800 an ounce by the end of the year. The outlook comes as gold prices trade between resistance around $1,850 an ounce and support at $1,800 an ounce.

Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley, said in a recent report that although inflation is expected to rise in 2021, it won't be enough to support gold prices.

"Morgan Stanley's economists forecast U.S. inflation to rise a little over 2% over the next two years. So this is hardly the runaway type of scenario for inflation that gold would seem best suited for," he said.

Weak inflation, coupled with an improving economic outlook, will continue to weigh on gold prices, the bank said. Sheets noted that gold's current valuation isn't very attractive.

"The price momentum is poor, which is to say that commodities that are falling often tend to keep falling," he said. "And current economic data, which is improving, has often meant gold underperforms other assets."

The comments come as gold prices struggle to find momentum as optimistic economic growth expectations push bond yields higher. The 10-year bond yield is currently trading at 1.2%, its highest level in nearly a year.

Analysts have noted that rising nominal yields are causing real yields also to push higher. This environment also increases gold's opportunity costs as a non-yielding asset.

Morgan Stanley is optimistic about the U.S. economy as they expect pent-up consumer activity will be unleashed in the second half of this year.

In a septate report, Chetan Ahya, Morgan Stanley chief economist, noted that the recession caused by the COVID-19 pandemic has cost U.S. households US$400 billion in income; however, the bank also said that consumers have already received more than US$1 trillion in transfers.

"Households have already accumulated US$1.5 trillion in excess saving, which is set to rise to US$2 trillion (9.5% of GDP) by early March once the additional fiscal package is enacted," Ahya said in the report. "We have argued that the policy response has averted significant scarring effects. Moreover, the impact of the exogenous shock is likely to fade, and we foresee a surge in demand as the economy reopens this spring."

Morgan Stanley sees the U.S. economy growing 6.5% this year, followed by 5% growth in 2022.

"These estimates imply that US GDP will rise meaningfully above its pre-Covid-19 path after 3Q21 and will be higher in 2022 than what we would have expected in the absence of the pandemic," he said. "That's a particularly remarkable outcome, especially when you consider that in the post-GFC period, the U.S. economy never really returned to its pre-recession path."

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