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Gold prices can still rise to $2,000 as rising bond yields force Fed action - Aberdeen Standard Investments

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(Kitco News) - Renewed technical momentum in the U.S. dollar and rising bond yields have taken their toll on the gold market as prices trade below $1,700 an ounce at a three-week low.

While some gold investors are getting a little frustrated with the lackluster price action so far this year, one market analyst said that the precious metal continues to play an essential role as a portfolio diversifier.

"Gold has been a difficult investment for the last two quarters, but the fundamental stories for the metal are still in place," said Steve Dunn, head of exchange-traded products at Aberdeen Standard Investments, in a recent telephone interview with Kitco News.

Dunn added that gold investors' current crisis of faith could last a little longer as gold prices will struggle in a rising bond yield environment; however, he added that this selloff in the U.S. bond market can't last.

Although gold prices have struggled through the first quarter of 2021, so far, Aberdeen is not looking to change its gold forecast. Dunn said that their base-case scenario is for gold prices to trade between $1,900 and $2,000 an ounce by the end of the year. The investment firm is expecting prices to push to new all-time highs by early 2022.

However, Dunn added that the market has to get past the current spike in yields. Dunn's comments come as 10-year bond yields rise to a new 13-month high of 1.77%. Meanwhile, June gold futures last traded at $1,685.70 an ounce, down 1.69% on the day.

Although bond yields have room to move higher, Dunn said that the Federal Reserve will continue to find ways to reinforce its loose monetary policy. Dunn added he suspects the U.S. central bank won't start to feel uncomfortable about bond yields until they reach 2%.

"It's in the Fed's best interest that rates remain low and the dollar weakens," he said. "Bond yields can continue to rise, but at some point in time that you're going to get a Fed response. At what level that happens, I don't know, but it will come. That is what everyone is waiting for."

Although investors expect to see a robust economic recovery, Dunn said that there is still a lot of uncertainty as government officials brace for what could be a fourth wave of the COVID-19 pandemic. While vaccines continue to roll out, some states still face logistical issues, particularly in rural areas.

"Summer travel is still in question, and that could have a huge impact on the economic recovery," he said. "We are still far away from a full economic recovery, and we still see a lot of scares in the labor market."

Dunn said that the U.S. economy could not support higher interest rates, and that is fundamentally positive for the gold market.

While the Federal Reserve is expected to keep interest rates at the zero-bound target, Dunn said that rising inflation would keep real interest rates at historically low levels for the next three years.

"The Fed needs to see higher inflation, but they don't need higher interest rates, and that is a perfect environment for gold," he said.

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.