Capital Economics predicts that the gold price will drop to $1,650 by the end of the year. However, he also notes that there will be a revival in 2023.
“Gold price is currently close to a cyclical trough”
Despite gains this week, gold is likely to drop to $1,650 by the end of the year before starting to recover, according to the latest forecast from Capital Economics. Caroline Bain, chief commodity economist at Capital Economics, said:
We think gold, which fell sharply in Q2, is currently close to a cyclical trough. Moreover, it is possible for the markets to revive a little due to the change in the US monetary tightening expectation in 2023.
“The price of gold in other major currencies is much better”
cryptocoin.comAs you follow, the precious metal has slumped around 11% since gold peaked in March when it was trading above $2,000. The Federal Reserve is aggressively fighting inflation through excessively high interest rate hikes. Also, there is a stronger US dollar. These two factors also drove the decline. Caroline Bain explains the issue as follows:
The gold price has dropped 11% since its last peak in March. It is possible that much of the decline is firmly placed at the feet of the dollar’s appreciation. After all, the price of gold in other major currencies is doing much better. Rising US real Treasury yields also played a role.
“Developments point to less monetary tightening than expected”
This week, gold stabilized after falling to $1,700. Prices are even trying to climb back to $1,800. At the time of writing, December Comex gold futures were down 0.44% on the day at $1,781.90. Caroline Bain comments:
There is a slowdown in economic growth. In addition, non-energy commodity prices are falling. These, in turn, point to less monetary tightening in the US than investors expected. Ten-year interest rates have fallen in recent weeks. US stocks rose and the dollar pulled back.
“US dollar will gain some value from here”
Capital Economics cites a strong US dollar outlook that offsets the benefits of additional safe-haven flows triggered by the war in Ukraine. In this context, he had predicted a decline in gold since March. “We recently revised our forecasts for the US markets,” said Bain.
Now we expect the 10-year Treasury rate to rise slightly by 3% by the end of 2022 and by 2.75% by the end of 2023. This indicates higher real interest rate expectations. We think the US economy will hold up better than other advanced economies in Europe and Asia. In addition, we consider that interest rate differentials will continue to support the dollar. Therefore, the US dollar will gain some value from here.
“We expect gold to drop to $1,650 by the end of 2022”
Because of this macro outlook, forecasts for bullion for the remainder of 2022 are still largely negative. However, Caroline Bain points out that this picture will change in 2023. In this context, she says:
There is still great uncertainty about the outlook for the global economy and the impact of the war in Ukraine. For now, we expect gold to see another minor drop to $1,650 by the end of 2022 before prices start to rise again in 2023.
“We expect jewelery demand to remain unchanged from 2021”
In the short term, India’s jewelery demand is likely to weaken as the import duty rises from 7.5% to 12.5% and the rupee depreciation will put pressure on prices. On the other hand, physical demand from China is trying to recover. Demand from the Middle East is likely to remain strong in light of high global oil prices. Caroline Bain comments:
All told, we expect gold jewelery demand to remain largely unchanged from 2021 in terms of volume. According to the World Gold Council, ‘Jewel demand has been suppressed in the first half of 2022, down 2% year-on-year. However, there has been a sharp contraction in sales in China due to virus-related lockdowns. However, it was offset by strong uptake in India due to wedding season and festivals. The drop in price since April has likely acted as an incentive in the price sensitive Indian market.
Central banks continue to add gold to their reserves
ETF holdings are expected to continue falling but remain close to historical highs. This will weigh on the gold price. On a positive note, central banks continue to add gold to their reserves, primarily in Turkey and Egypt. Bain makes the following assessment on this subject:
That will be enough to offset the burden on the gold price from rising US interest rates, dollar appreciation, ETF exits and restricted jewelery demand.
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