Higher yields, strong dollar to knock gold price down to $1,650 by year-end - Capital Economics
(Kitco News) Despite last week's gains, gold has kicked off the new trading week down 1% on the day. And Capital Economics is projecting more losses ahead as the strength of the U.S. dollar and rising Treasury yields pressure the precious metal down.
In its latest commodities update, the Capital Economics team said it sees gold ending the year at $1,650 an ounce. That is nearly $150 lower than current prices. At the time of writing, December Comex gold futures were trading at $1,796.50, down $19 on the day.
The outlook comes despite last week's gains of 1.5% following a slowdown in inflation. The CPI numbers came in below expectations last week, with the annual inflation running at 8.5%, following June's 9.1% print. Despite the quick rally, many analysts were disappointed with gold's failure to capitalize on the immediate move higher.
The inflation news was initially positive for the gold space because it put a stop to market expectations of another aggressive move by the Federal Reserve at its September meeting, the Capital Economics' commodities team said in a report on Friday.
"Our view is that headline inflation has peaked and that the Fed will hike rates by 50bp, rather than 75bp, at its next meeting," they wrote.
Capital Economics' $1,650 an ounce gold price outlook is based on the premise that the U.S. 10-year Treasury yields will rise by the end of the year.
"Most commodities got a boost as investors pared back expectations for rate hikes in the U.S., following lower than expected inflation data. That said, we still expect a further small rise in the U.S. 10-year Treasury yield by the end of the year, which could put renewed downward pressure on the prices of commodities, and particularly gold, in the coming months," the report said. "Our end-year forecast is $1,650 per ounce."
Capital Economics has been 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 to around 3% at end-2022 (4% previously) and 2.75% at end-2023, which points to higher real yield expectations … 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."
For Capital Economics' gold price outlook in 2023, click here.
For palladium and platinum, Capital Economics sees continued gains for the rest of the year, with the latter posting slightly fewer gains overall.
"While we expect another year of deficit in the palladium market, which offers some support to the price rally, we do not expect the price of platinum to perform as strongly given the bleak outlook for global auto production," the report noted. "[Data from China] will show that the post-lockdown recovery lost steam in July, alongside a renewed deterioration in the property sector, which could weigh on industrial metals prices next week."