Can gold rebound above $US2,000/oz? Don’t hold your breath, CBA says
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Gold investors can sit tight — prices aren’t likely to go anywhere fast in 2021, CBA says.
The precious metal maintained its ‘store of value’ in a crisis, climbing from March lows of around $US1,400 before breaking the $US2,000 barrier for the first time ever.
The whirlwind that was 2020 saw prices stabilise around $US1,900. But by December, some analysts were bullish about a push back above $US2,000 a inflation expectations rise.
Looking at the year ahead, CBA commodities analyst Vivek Dhar flagged that long-term inflation expectations have in fact climbed.
So too have benchmark US 10-year bond yields — a reflection of the improved growth prospects for the global economy since the first COVID-19 vaccine approvals were announced in November.
“While the rise in US 10-year bond yields is clearly negative for gold prices, the rise in US 10-year inflation expectations is positive for the precious metal,” Dhar said.
When ‘real’ yields go negative — in other words, when forecast inflation rates exceed the level of US 10-year bond yields — gold prices rise.
And in Dhar’s view, that negative relationship “is the best indicator for longer term movements in the precious metal”.
So in making a gold price forecast, the million-dollar question is; what will inflation do relative to yields?
Weighing it up from both sides, Dhar noted that central banks — led by the US Fed — have so far shown no inclination to change tack from the quantitative easing (QE) and rock-bottom rates settings currently in play.
That kind of ultra-easy monetary policy may get the inflation dragon stirring.
But on the flip side, CBA doesn’t think those forces will outweigh the “disinflationary forces through the output gap from COVID-19 over the next few years”.
The output gap measures the difference between actual output and potential output in the economy.
In other words, the US economy still isn’t meeting its full potential.
US Fed chair Jerome Powell said as much in comments earlier this week, highlighting that the US economy still has a long way to go on the post-Covid journey back towards full employment.
The net effect is that gold prices are likely to track sideways this year, Dhar said.
“We think gold prices will remain range-bound between $US1,800-$US1,900/oz in 2021,” he said.
When it comes to gold prices denominated in USD, the USD itself is also an important part of the equation.
And on that front, Dhar said the USD may come under pressure if global growth rates rebound as the vaccine is rolled out.
“Global growth has historically resulted in a weaker US dollar,” Dhar said.
However, “the inverse relationship between the US dollar and gold isn’t as strong as US 10-year real yields and gold,” he added.
So for gold watchers, that will be one of the key metrics to watch as the global economy continues its non-linear rebound out of the pandemic.