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Gold price to fall $200 by year-end despite stronger physical demand, says Capital Economics

Kitco News

(Kitco News) The recent rebound in consumer appetite for physical gold will not stop prices from falling to $1,600 an ounce by the end of the year, according to Capital Economics.

The firm's bearish outlook on gold remains well intact despite the precious metal's attempts to once again breach the $1,800 an ounce level. At the time of writing, June Comex gold futures were last trading $1,774.80, down 0.95% on the day.

New data from the first quarter of this year point to a strong rebound in physical demand for gold, especially within India and China.

During the first quarter, most of the demand was driven by the world's two major consumers of physical gold. After dropping off last year, demand for jewelry, bars and coins in both countries managed to recover close to the levels reported in 2018 and 2019, according to the World Gold Council's latest Gold Demand Trends report.

On top of that, recent trade data is showing a rise in imports, with India's March gold imports, for example, coming in at their highest level since 2013. There were also reports that the People's Bank of China raised the gold import quota to allow around 150 tonnes of gold to be imported into China between April and May.

"Strong consumer demand for physical gold has offset some of the fall in demand for gold-backed investment products in recent months," said Capital Economics assistant economist Adam Hoyes. "But we don't think this poses much of a risk to our forecast for the gold price to fall this year."

Capital Economics listed three reasons why it still sees gold dropping nearly $200 by the end of the year.

1. It sees the rebound in physical demand as driven by a response to a drop in gold prices.

"The upshot is that consumer demand for gold responds to changes in the price (often driven by external factors) much more than the gold price responds to changes in consumer demand. So the recent rise in consumer demand is a symptom of a lower gold price, rather than a reason to think it will rise again," said Hoyes.

2. The rise in India's gold imports is a temporary phenomenon and not a permanent shift in sentiment.

"Imports may have been boosted by seasonal stockpiling and delayed purchases from earlier months given expectations for a cut to gold import duties, which was announced in February. In any case, the worrying resurgence in virus cases in India will probably also depress gold demand in the near term," Hoyes noted.

3. The U.S. real yields and the U.S. dollar are the more important drivers of the gold price this year, limiting the positive impact improved demand for the physical metal will have on the overall prices.

"We expect both to weigh on the price of gold over the next year or so. The recent rise in longer-term real yields in the U.S. will resume before long, which would increase the opportunity cost of holding gold. Meanwhile, we also anticipate that a stronger U.S. dollar will make gold more expensive to non-U.S. investors," Hoyes added.

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