(Kitco News) – Gold prices have lost momentum as drivers have diverged and traditional relationships have broken down, so investors should be cautious about the yellow metal, according to a new report from ABN Amro Senior Economist Georgette Boele.
In an updated gold price forecast published on June 27, Boele referred to her previous forecast from April 15 entitled ‘The sky seems the limit for gold prices.’
“Since then, prices have set a new high, but the rally has lost momentum,” she noted. “What do we expect for gold prices for the remainder of this year. We approach this in a similar way with Q&A.”
The first question is whether the expected central bank easing that has occurred has been supportive of gold prices. Boele said it hasn’t.
“The market has already anticipated the possible start of the easing cycle by major central banks for quite some time now,” she wrote. “Even though the ECB started easing in June, the Fed will start later in our view (first rate cut now foreseen in September). In fact, expectations about monetary policy easing in the US have decreased this year. Therefore, from this angle, gold prices should have been lower and not higher.”
“Have US real yields supported gold prices? No,” she said. “US real yields are US Treasury yields corrected for inflation expectations. Higher and positive real yields indicate that the market is of the view that the central bank is taking appropriate action to cool inflation. Indeed, the Fed has waited to start easing monetary policy, as US inflation was sticky.”
Boele said that gold prices usually rise if U.S. real yields decline and vice versa. “However, this year this relation has broken down,” she said. “US real yields have risen, while gold prices have risen as well.”
She also answered “no” to the question of whether the U.S. dollar’s moves have supported gold prices. “So far this year, the US dollar has had a good run. It has risen by approximately 5% against a basket of currencies,” she said. “Gold prices have also risen; by close to 11%. Gold prices normally have the tendency to decline if the dollar rises.”
Another factor that would support gold prices is a shortage of physical gold. Here again, Boele answers in the negative.
“During the COVID crisis, physical gold experienced a shortage. This translated into high gold demand on the futures market and a large premium to buy physical gold,” she noted. “So far this year, speculative positions have risen, but the premiums paid on gold coins (Eagle and Maple Leaf) are below their long-term averages (albeit positive). Some of the other gold coins show negative premiums so that prices are considerably below spot gold prices.”
“Overall, according to these factors, there is no shortage,” she said.
As to whether or not investors have been stockpiling gold, Boele said “Yes and No.”
She noted that on the one hand, ETF investors have decreased their positions in recent years, driving total gold ETF positions below 2019 levels. “Usually, if ETF investors liquidate their positions gold prices decline,” she said. But on the other hand, “speculative positions in the futures market have increased this year though and are now relatively large (not extreme),” she said. “The rise of speculative positions in the futures market may have offset some of the effect of the ETF position liquidation.”
As to the question of why gold prices remain elevated despite these mitigating factors, Boele listed the three main factors she believes are supporting gold prices.
“First, investors have bought gold on the futures markets and in other forms,” she wrote. “Second, central banks, for example of China, have bought gold. Indeed, world gold reserves have modestly risen this year. Third, the technical picture has been positive resulting in trend buying by investors.”
She noted, however, that the rally has lost momentum since the high of $2,450 per ounce was set on May 20, and prices have fallen below the 50-day moving average. “The important support zone is USD 2,220-2,275, where previous tops and bottoms are layered (previous break out level),” she said. “Below that level, the next support zone is USD 2,115, where the 200 days moving average comes in. If prices decline below the 200 days moving average the long-term trend turns negative.”
Boele concluded with the big question: What is their expectation for gold prices going forward?
In response, she listed a number of reasons why ABN Amro remains cautious about the outlook for gold prices. “First the trend in gold prices is positive, but the momentum is declining,” she wrote.
“Second, it is unusual for gold prices to have positive relationships with the US dollar and 5yr and 10yr US real yields,” she noted. “Even though these changes have occurred in the past, they tend to be temporary in nature, meaning that they could last around 3 to 6 months. If gold prices were to react to central bank expectations again, they will probably remain stable versus the US dollar and rise somewhat versus the euro this year, reflecting our Fed and ECB views compared to the market.”
“Third, there is no shortage in physical gold at the moment and the amount of central bank buying is not justifying gold prices at current levels,” she concluded. “Therefore, we keep our year-end forecast of USD 2,000 per ounce for now.”
