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Gold price can still reach $1,900 by year-end but will struggle as inflation, interest rates rise - Credit Suisse
(Kitco News) - Despite gold's dramatic drop through critical support levels, one bank sees potential for prices to push back to $1,900 an ounce by the end of the year. However, the precious metal will have to contend with higher inflation and interest rates in the next few years.
Wednesday, in a Zoom discussion, Fahad Tariq, precious metals analyst at Credit Suisse, said that even at lower prices, there is still plenty of value in the gold sector, particularly in the equity space.
He added that although the Federal Reserve has signaled that it could potentially raise interest rates in 2023, real interest rates are still in negative territory, and this isn't going to change anytime soon.
Tariq said that Credit Suisse sees gold in a holding pattern right now; however, it is still a positive environment for gold producers. The comments come as August gold futures currently trade at $1,783.60 an ounce, up 0.36% on the day.
"If you had told gold producers years ago that this is the gold price, you'll have to deal with it. They would have been ecstatic. Their margins are extremely wide. You're seeing very strong cash flow, and balance sheets are as strong as they've ever been." he said.
"Even if you assume flat gold prices or that gold prices go down a little bit, you will still see very strong fundamentals for these equities," he added.
However, the bank is not so optimistic on gold in the long term. In the discussion, James Sweeney, managing director and chief economist at Credit Suisse, said that investors need to prepare for a new inflation regime.
Sweeney noted that in the last decade, inflation had hovered around 1.7%. Although he is not expecting to see a major hyperinflationary environment, he said that inflation could trend around 3% for the next decade.
He added that gold could struggle in the next few years as inflation pressures stabilize at higher levels, with both nominal and real interest rates pushing higher. He added that the risk is if inflation is persistently hotter than economists and the central bank are expecting.
"I wouldn't be surprised if the neutral short-term rate is above 3%, five years from now, even 3.5%. For gold, that will matter if that happens," said Sweeney. "At some point, if inflation turns out to be stubborn, the market reassesses that short rate expectation to something higher, gold and a number of other assets are not going to like that news. I think that's a major risk for financial markets broadly over the next two years."
Along with higher average inflation, Sweeney said that he also expects economic volatility to pick up.
"It's related to the fiscal challenges and the big, expensive problems that that governments have and the big debt stock that we have. I think these are going to create sources of volatility in the short run," he said.
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