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Scotiabank lowers gold price forecast to $1,800 as Fed prepares to tighten monetary policy

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(Kitco News) - Aggressive Fed action will keep gold prices anchored in the current range through 2022, according to the latest report from Scotiabank.

In a report published Tuesday, the Canadian Bank downgraded its gold forecast to an average of $1,800 an ounce, down from its previous average estimate of $1,850 an ounce. At the same time, Scotiabank downgraded its silver forecast to $24.50 an ounce, down from the prior estimate of $25 an ounce.

"With interest rate hikes now expected to come earlier and more often this year, we have lowered our gold and silver price forecasts incrementally," said Marc Desormeaux, senior economist at Scotiabank Economics, said in the report.

Last week the Federal Reserve was slightly more hawkish than expected as it said that it looks to raise interest rates "soon." The U.S. central bank also set the stage to reduce its balance sheet after it starts raising interest rates.

Markets are pricing in the potential for five rate hikes this year, with the first coming in March.

Gold bulls on the defensive after sharp drop following recent Federal Reserve meeting

Although interest rates will create a headwind for precious metals, Desormeaux said he does not see a major price route as rising inflation will continue to support the market.

"Despite the downgrade, our projection for gold in 2022 would still be the highest annual average price since at least 1988. Given the acceleration in inflation, the rate environment remains very accommodative despite our more hawkish shift—our forecast is consistent with negative real U.S. 10-year rates through 2023," he said. "Market uncertainty should also remain elevated albeit easing as we continue to grapple with COVID-19, which supports the attractiveness of precious metals as safe-haven assets."

While Scotiabank is relatively neutral on gold at the start of the new year, they are extremely bullish on industrial metals, particularly copper. Desormeaux said that he sees copper prices well supported around $5 a pound for at least the next three years.

"In the next couple of years, we expect the global recovery to keep values of the bellwether red metal strong, with supply disruptions via Latin American geopolitical developments likely to provide additional pricing support," he said. "Over the longer-run, we assume that strong demand growth will come via global decarbonization efforts—copper is expected to be a key input for battery production and climate infrastructure construction."

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