Gold's path to $2,000 is becoming difficult - Société Générale
In a report Tuesday, analysts at the French bank said that they continue to see gold prices pushing to $2,000 an ounce by the end of the year; however, they added that their conviction behind this forecast is weakening.
"The reflation theme must include gold, which is the one factor leading us to maintain a positive 2021 outlook. But if that story loses momentum, our supportive outlook could fall apart quickly," the analysts said.
The analysts said that rising inflation pressures will continue to be the dominant factor for the gold market. However, they added that investors need to focus on real interest rates rather than nominal rates.
"We expect flows to be positive in 2021 on the reflation trade, but rising rates mean that there are conflicting forces affecting the gold price. It will be important to evaluate whether the market remains focused on real rates, which should stay slightly negative due to inflation, or nominal rates, which should rise and appears to increase the opportunity cost of holding gold," the analysts said.
Looking at investment demand, SocGen said that they expect inflows of 100 tonnes this year will be enough to push prices to $2,000 an ounce.
Along with inflation pressures, the analyst said that one scenario they are watching for is a potential sovereign debt crisis as nations deal with the excessive spending needed to support the global economy devastated by the COVID-19 pandemic.
"If one or multiple sovereign debt crises emerged, we see gold investment rising, but there could be headwinds as the US dollar would then also strengthen," they said.
The French bank also noted that ongoing geopolitical uncertainty would also be supportive for gold.
On the bearish side, the analysts said that improving economic conditions remain the biggest threat to the precious metal.
"Our upside economic scenario, which implies an extremely smooth and effective rollout of a vaccine, would still be the most bearish for gold as it would ease equity turmoil concerns and dovish monetary policies," the analysts said. "The larger downside risk of an improved economic scenario with higher rates would, we believe, add an additional 200 tonnes of ETF outflows and could subtract $200/oz if not more, off our base case forecast."
Although the bank is growing uncertain about this year's price forecast, the analysts said that they have a lot more conviction for 2022. They see gold prices falling to $1,750 an ounce by the end of next year.
"We see the unwinding of monetary easing and a possible new rate hike cycle potentially triggering sizeable ETF outflows. This is the premise behind our expectations of a steep gold price drop in 2022. We assume negative ETF flows of 300t next year, which would see prices retreat to a $1,750/oz average in 2022," the analysts said.