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Geopolitical uncertainty isn't sustainable, gold price to head to $1,600 by year end - Capital Economics

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(Kitco News) - Gold prices are trading near their highest level since June, just below $1,900 an ounce; however, one research firm said that at some point, geopolitical uncertainty will give way to bearish fundamentals.

In a report published Monday, analysts at Capital Economics reiterated their bearish stance on the precious metal. It still sees the price falling to $1,600 an ounce by the end of the year.

The comments come as rising geopolitical tensions between Russia and U.S. created new safe-haven demand for gold, pushing prices above $1,900 an ounce Sunday evening. However, Oliver Allen, markets economist at the U.K.-based research firm, said it's only a matter of time before raising interest rates weigh down the precious metal.

Allen noted that gold prices had rallied about 4% in the first two months of 2022. At the same time, 10-year Treasury Inflation-Protected Securities (TIPS) yields have risen around 60 basis points.

"The main factor driving the divergence between real yields and the gold price this year so far has been safe-haven demand for precious metals on the back of geopolitical tensions involving Russia and Ukraine. If the current tensions persist or an outright conflict breaks out, gold will presumably continue to receive some support from safe-haven demand. However, if tension eased from here, we think gold would drop back quite significantly," he said in the report.

Geopolitical uncertainty dominates gold market as prices hold near $1,900

Allen said that his firm expects real yields to continue to push higher as the Federal Reserve looks to raise interest rates and reduce its balance sheet before the end of the year. Currently, markets are pricing in the possibility of six rate hikes this year.

Along with geopolitical uncertainty, another factor that could counter Capital Economics outlook is rising inflation pressures. Recent data showed that consumer prices rose 7.5% for the year in January, its highest level in 40 years.

"However, we think that headline inflation in the U.S. will ease considerably over the course of this year. And in any case, the historical record suggests to us that inflation alone is not sufficient to drive the price of gold higher. The relationship between the general price level and the price of gold in the short to medium-term is weak even if gold has certainly managed to hold its value in real teams over longer time horizons," he said.

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