Gold still has a chance to move higher in the face of the best economic growth in 40 years - Scotiabank
(Kitco News) - One Canadian bank continues to hold on to its forecast for a relatively steady gold price through 2021 even as the global economy could see the best economic recovery in more than 40 years.
In its monthly commodity report, Scotiabank reiterated its forecast for gold prices to average this year and next around $1,850 an ounce; The outlook comes even as the bank expects to see strong economic growth in the U.S. and around the world.
Expectations for a robust recovery have been the biggest hurdle for gold prices. The optimism has pushed bond yields and the U.S. dollar to levels not seen since before the pandemic. Tuesday gold prices fell sharply below $1,700 an ounce as the yield on 10-year bond notes rose to a 14-month high to 1.77%. The U.S. dollar is currently trading above its 200-day moving average for the first time since May 2020.
The gold market has managed to recover some of its ground from Tuesday's selloff. June gold futures last traded at $1,708.40 an ounce, up 1.33% on the day.
However, economists at Scotiabank are not expecting the economic recovery to lose momentum anytime soon. In its updated economic forecast, the bank sees the U.S. economy expanding 6.2% this year and 4.4% in 2022. The analysts said that this is the most robust pace of growth since 1984.
"The expected vigor in the United States is nothing short of astounding. A rebound from the pandemic was always expected to lead to solid growth this year. Still, the stimulus cheques paid early in January and the $1.9 trillion American Rescue Plan will turbo-charge the recovery," the economists said.
The analysts added that strong economic activity will continue to support higher bond yields. The bank sees the 10-year yield pushing to 2% by the fourth quarter.
The move observed thus far is, in our view, entirely consistent with the improvement in the outlook and does not represent a headwind to growth.
Although vigorous economic growth coupled with rising bond yields creates some headwinds for precious metals, the bank still sees potential for gold through the rest of the year as inflation picks up.
"Inflationary fears related to President Biden's stimulus package may engender new investor preference for gold as an inflation hedge," said Marc Desormeaux, senior economist at Scotia and author of the latest commodity report.
Although the bank remains relatively positive on gold through 2021, Desormeaux said that silver continues to be the precious metal to watch.
"Unlike gold, however, silver has a wide range of industrial uses and is therefore poised to benefit so long as global construction and manufacturing activity gain as the global economic recovery progresses," he said.
Silver has also managed to push off its recent lows. May silver futures last traded at $24.45 an ounce, up more than 1% on the day.