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Commerzbank sees gold price pushing to $1,900 by year-end, moving $2,000 target to next year

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(Kitco News) - The gold market has pushed back above $1,800 an ounce, and while the precious metal has room to move higher, one major bank is lowering its year-end price target.

In a report published Friday, commodity analysts at Commerzbank said that they see gold prices ending the year around $1,900 an ounce, down from their previous price target of $2,000 an ounce. However, the downgrade in this year's price target is just a tactical retreat. The German bank remained a long-term bull and pushed its $2,000 price target to 2022.

"As soon as the U.S. Federal Reserve announces that it will start to reduce its bond purchases, an important obstacle for the gold price should disappear. Moreover, our economists expect U.S. inflation to start falling significantly as early as the fourth quarter. This should take some wind out of the sails of the interest rate hike expectations that have just emerged," the analysts said. "Next year, U.S. inflation is even likely to fall below the Fed's inflation target again, which should further weigh on interest rate expectations. We, therefore, expect the gold price to rise significantly over the next 12 months."

Not only does Commerzbank see the potential for gold as they expect the U.S. central bank to keep interest rates at historically low levels, but the analysts noted that the precious metal is cheap compared to other historical standards.

"In our opinion, gold is currently trading at an unjustifiably low level and is too cheap compared to other asset classes: one troy ounce of gold is equivalent to just under 5% of the Dow Jones Industrial Average. Over the past ten years, it has averaged 7.6%, at its peak even more than 17%," the analysts said.

One key factor that will drive gold prices higher is the return of investor demand. Gold prices have dropped more than 13% from last year's highs as investors pulled 270 tonnes of gold out of gold-backed exchange-traded funds since August 2020.

"This is almost equivalent to one month's global gold mine production," the analysts said.

However, the German bank added that weak ETF demand obscures other pillars of strength in the marketplace, notably physical demand for bars and coins.

Quoting data from the World Gold Council, Commerzbank said that 62 tonnes of gold bullion were bought in the U.S. in the first half of the year. In Germany, the demand for gold coins and bars was around 90 tonnes.

"Demand for these investment forms in North America more than doubled in the first half of 2021 compared to the previous year," the analysts said.

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