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Bank of America still calling for $2,000 gold price but headwinds are picking up

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(Kitco News) - There is still potential for gold prices to push above $2,000 an ounce in 2021; however, analysts at Bank of America (BoA) see growing risks to the upside as inflation fears appear to be contained.

In a report published Tuesday, the BoA noted that the gold market is facing some difficult challenges as the COVID-19 pandemic continues to weigh on physical jewelry demand in critical markets. The analysts also noted that central bank demand for gold has slowed, and the latest pillar of strength to weaken is waning investor interest.

Despite the challenges ahead, Bank of America is maintaining its forecast for prices to average the year around $2,063 an ounce. The analysts said that gold's peak is likely to come in the second quarter as they see prices averaging the three-month period around $2,100 an ounce.

The analysts said that the biggest hurdle for gold remains inflation pressures. They noted that the global macro backdrop is quickly changing, discouraging investor inflows into gold.

"The gold market has struggled to price in reflation. Rising breakevens have been mirrored by higher nominal rates. As a result, real rates, usually the key driver of the yellow metal, have been in a tight range since autumn," the analysts said in the report.

"With the Fed likely on hold near-term, breakevens are set to rise further, a positive for gold. Yet, the last upward trend in nominal rates was not bullish for gold, even as consumer inflation accelerated. So apprehension over a normalisation of monetary policy could resurface in 2H21," they added. "Many of the underlying issues, including excess liquidity in the system and debt sustainability, have not gone away. Hence, we believe gold prices will ultimately stabilise despite the ongoing challenges."

Looking at gold jewelry demand, Bank of America said that while sales in India and China are slowly starting to improve, there is a long way to go before they reach pre-pandemic levels.

"Going forward, we expect the rebound to continue, partially because the country's economy recovers from the pandemic and authorities foster retail consumption, but also because the jewelry industry is now in a much healthier condition after a period of consolidation," the analysts said.

Bank of America is also optimistic that central bank gold demand will also pick up from the lows levels seen last year.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.