Investors’ love for gold has been rekindled. Lower bond yields and a weaker US dollar helped stem the outflow of money from the safe-haven asset. But a surge in inflation has revitalised interest and helped gold regain most of this year’s losses. Economists at ANZ Bank expect core US CPI to remain above 3%for the moment. This is likely to push up inflation expectations and allow gold prices to rally.
See – Gold Price Analysis: Three factors to drive XAU/USD higher – DBS Bank
The backdrop suggests an upside in gold
“With the US economy firing on all cylinders and ongoing supply bottlenecks, substantial fiscal stimulus and a rapid vaccine rollout, we expect core US CPI to remain above 3% for the rest of the year.”
“Our central case for the USD is that there is further weakness ahead. We are relatively convinced that growth will continue to improve and ultimately broaden out beyond the US. This will be enough to generate modest weakness in the USD. A more precipitous fall will take time to manifest. For that to occur, we would need to see central banks sticking to their new commitments to allow economies to run hot and inflation to overshoot.”
“For the moment, investors appear to be responding. Speculative net-long positions bottomed out in late March and have increased by 146 tonnes so far in Q2 2021. Both the building of new long positions and the squaring-off of short positions have contributed to this increase in net-length. While investment demand is turning strong, the second wave of the pandemic in Asia could hit the physical off-take. Physical demand has been strengthening in Q1 2021, which looks difficult to sustain in the midst of still higher numbers of daily cases. While easing lockdown would help demand recovery in the July-September quarter, last quarter is expected to shoulder most of the demand for this year.”
“Using our forecasts for inflation, bond yields and the USD, our gold valuation model suggests prices could push back above $2,000/oz in H2 2021. Nevertheless, gains beyond that will be increasingly hard to achieve as the world economy recovers from the pandemic. Should inflation prove persistent and inconsistent with the Fed’s 2% mandate, members say the Fed won’t hesitate to act. Any subsequent rise in interest rates or reduced bond purchases would likely weigh on investor demand.”
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