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The gold market needs to start attracting new investment demand now if it has a chance to get back to $2,000 - SocGen

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(Kitco News) - Patience is starting to wear thin for bullish gold analysts at Société Générale as the precious metal has been unable to attract any upside momentum despite an environment of rising inflation and low real interest rates.

"We are still slightly supportive in the near term as we expect monetary and fiscal policy to remain highly accommodative. However, our conviction is mainly pinned to our expectation that the ETF outflows will cease, and we will begin to see some moderate inflows by the end of the year," the analysts said in their latest report.

SocGen's comments come as gold prices struggle to hold the critical psychological level at $1,800 an ounce. December gold futures last traded at $1,790.60 an ounce, down 0.43% on the day.

The French bank noted that investment demand has been a critical factor weighing on gold. Since peaking in October 2020, gold-backed exchange-traded products (ETPs) have seen outflows of 364 tonnes.

"In 2021 alone, we have seen 244 tons of outflows. With positive economic readings and, in particular, positive jobs data, market participants appear to be focused on the prospect of an earlier-than-anticipated interest rate hike. And although real rates are still expected to be negative, any sign that they could turn positive faster would really dampen investment flows," the analysts said.

Looking to 2022, the bank reiterated its base case for gold prices to average the year around $1,750 an ounce. The bank does see a bullish case for the gold price to rise above $2,000 an ounce next year.

"Our economists' downside economic scenario stemming from COVID-19 would still be moderately bullish for gold and could still be one of the most significant upside risks, but there are other risks that could also push up gold prices," the analysts said.

Another bullish scenario for gold is if the massive liquidity pumped into financial markets to support the global economy ignites a new debt crisis.

"If a new sovereign debt crisis emerges, gold flows should increase, but that could be capped by a flight to quality into the US dollar," the analysts said.

On the downside, SocGen said that any increase in economic activity next year could push gold prices to $1,600 an ounce.

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