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Gold price to drop to $1,650 by year-end but a revival is coming in 2023, says Capital Economics

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(Kitco News) Despite this week's gains, gold is still likely to drop to $1,650 by the year-end before staging a recovery, according to the latest forecast from Capital Economics.

"Having fallen sharply in Q2, we think that the gold price is now close to a cyclical trough. What's more, the price should revive a little in 2023 as markets factor in the prospect of U.S. monetary tightening," said Capital Economics chief commodities economist Caroline Bain.

Since reaching a peak in March when gold traded above $2,000 an ounce, the precious metal has been on the retreat, falling around 11%. The slide has been driven by a stronger U.S. dollar and the Federal Reserve's aggressive fight against inflation via its oversized interest rate hikes.

"The price of gold has dropped by 11% since its recent peak in March. Much of the fall can be placed firmly at the feet of dollar appreciation. After all, the price of gold in other major currencies has held up much better. Rising U.S. real Treasury yields also played a part," Bain said Wednesday.

This week, gold has stabilized after falling to $1,700 an ounce, with prices even attempting to climb back to $1,800. At the time of writing, December Comex gold futures were at $1,781.90, down 0.44% on the day.

"Slower economic growth and a slump in non-energy commodities prices point to less monetary tightening in the U.S. than investors had been anticipating. In recent weeks, 10-year yields have fallen, U.S. equities have picked up, and the dollar has eased back," Bain pointed out.

Capital Economics was forecasting a drop in gold prices since March, citing a strong U.S. dollar outlook offsetting benefits from additional safe-haven flows triggered by the war in Ukraine.

"We have recently revised our forecasts for U.S. markets. We now expect the 10-year Treasury yield to rise a little to around 3% at end-2022 (4% previously) and 2.75% at end-2023, which points to higher real yield expectations too," Bain added. "Meanwhile, we continue to forecast that the U.S. dollar will appreciate a little from here, given that we think the U.S. economy will hold up better than other advanced economies in Europe and Asia and that interest-rate differentials will continue to favor the dollar."

Because of this macro outlook, the forecast is still largely negative for gold for the rest of 2022. But that picture changes in 2023, Bain pointed out.

"There is still huge uncertainty about the outlook for the global economy and the impact of the war in Ukraine … For now though, we expect a further small fall in the gold price to $1,650 per ounce by end-2022, before prices start to rise again in 2023," she said.

Live 24 hours gold chart [Kitco Inc.]

In the short term, India's jewelry demand could weaken due to a rise in import duty from 7.5% to 12.5% and rupee depreciation, which would weigh on prices. On the other hand, physical demand from China is looking to rebound, while demand from the Middle East is likely to remain robust in light of higher global oil prices.

"All told, we expect gold jewelry demand to be broadly unchanged from 2021 in volume terms," Bain said. "Jewellery demand was subdued in H1 2022, falling by 2% year on year, according to the World Gold Council. However, a sharp contraction in sales in China owing to virus-related lockdowns (which should prove a temporary phenomenon) was offset by strong buying in India due to the wedding season and festivals. The fall in price since April probably also acted as an incentive in the price-sensitive Indian market."

ETF holdings are expected to continue to fall back but remain near historically high levels, which will also weigh on the price of gold.

On a positive note, central banks continue to add gold to their reserves, especially Turkey and Egypt. "This will be sufficient to offset the drag on the gold price from rising U.S. yields, dollar appreciation, ETF outflows, and restrained jewelry demand," Bain noted.

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.