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Gold prices could hold around $2,000 for the next two years - ABN AMRO

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(Kitco News) - Gold prices are expected to maintain the $2,000 an ounce level for the next two years even as the market remains volatile, according to one market strategist.

In a report published Thursday, Georgette Boele, senior precious metals strategist, said that Russia's assault on Ukraine had created an uncertain environment, and while gold has been an attractive, safe haven, there are also other factors supporting the precious metal.

"Since 8 February, the relationship between gold prices and the VIX has turned positive (higher equity market volatility, higher gold prices) and the relationship between gold and real yields have remained negative (lower real yields higher gold prices). Next to that the positions in ETF have increased but not enough to justify the large rise in gold prices," Boele said in her latest report. "This points into the direction that investors have bought gold as a store of value and probably also as a transaction unit. They fear inflation and the war and the currency debasement and favor physical gold."

Boele added that she is upgrading her gold market forecast and sees prices holding around $2,000 an ounce by the end of this year and 2023. Her updated forecast is a start shift from her previous outlook, where she expected prices to fall to $1,500 an ounce by the end of the year.

The new outlook comes just days after gold prices hit a new all-time intra-day high of $2,078.80 an ounce. Gold has fallen from its recent peak as it now tests support at $2,000 an ounce. April gold futures last traded at $2,002.70 an ounce, up 0.72% on the day.

Boele explained that Russia's war with Ukraine is upending the global economy and crippling economic sanctions against Russia will create further disruptions in the global supply chains of critical commodities, including energy, agriculture, and some industrial metals.

"We expect that consumer price inflation more broadly will spike further, weighing on confidence and consumption. We think that growth will be weaker, inflation will be higher and central banks will react differently to these new challenges," she said. "We expect that gold prices are supported in the current environment but that there also will be a lot of price volatility."

Although gold prices are expected to remain elevated in the next two years, Boele said that the market would also face some challenges. Expectations for aggressive monetary policy tightening from the Federal Reserve have fallen significantly in the last two weeks; however, markets are still pricing in rate hikes through the year. The CME FedWatch tool shows the markets see interest rates rising to at least 2.25% this year.

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Boele said that this environment supports a stronger U.S. dollar, which could weigh on gold prices. 

Boele added that helping to support gold in a rising rate environment will be rising inflation, which will keep real yields lower.

Another risk ABN AMRO sees is that gold could also get caught in a broad-based wave of panic selling if the conflict and market uncertainty rise suddenly.

"Severe risk-off and even market panic is usually not a positive environment for gold prices (remember the aggressive sell-off during the covid panic in March 2020). When there is market panic, investors liquidate most positions and buy the most liquid assets such as U.S. Treasuries, the U.S. dollar and the Japanese yen. They will likely also sell speculative gold positions such as ETFs and other instruments and these positions are extremely large," she said.

Finally, Boele said that she expects to see more demand for physical gold in the current environment than the paper ETF market.

"If investors fear a war or severe stress, they also prefer gold. These investors often buy physical gold like coins or bars, or futures that could deliver physical gold," she said.

She added that panic selling in ETFs could have a more significant impact on prices than strong physical demand.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.