Gold: Stars aligned for a test of $2000 – ABN Amro

The stars are aligned for gold prices and a test of the psychological level of $2,000 is within reach now, according to strategists at ABN Amro as a lower dollar, aggressive monetary policy easing, ultra-low interest rates, negative US real yields, fiscal stimulus and the technical outlook all support gold price.

Key quotes

“Since the start of July USD has declined. For a start a more constructive sentiment on financial markets has resulted in lower safe-haven demand for the dollar. In addition, investors shy away from the dollar because of the tensions between the US and China and the Presidential elections. Moreover, the handling of the COVID-19 situation in the US has weighed on the US dollar. Finally, the monetary policy easing by the Fed is a crucial driver of dollar weakness.”

“Central bank policy is a strong driver behind higher gold prices. Official rates are close to zero in a large number of countries and they will unlikely go up in our forecast horizon. Moreover, most central banks have announced QE. This sounds like music to the ears of gold bugs as money floods into the market and currencies begin to decline.” 

“In a number of countries there are negative rates (official and/or government bond rates). Gold is not paying any interest rates. So negative rates are another major support to gold prices especially versus the euro.” 

“The US may not have negative official rates or government bond yields, but nominal rates corrected for inflation expectations (real rates) are in negative territory. As long as there are expectations that the Fed would move to a form of yield curve control, the upside in US Treasury yields is limited. So, if investors are concerned about inflation in the longer run this will be visible in inflation expectations and negative US real yields. Our US economist expects relatively stable US Treasury yields and no pick-up in inflation, because of the negative effect of the pandemic on the economy. So, we think that this driver should have less impact going forward.”

“Governments have embarked on large-scale fiscal stimulus to support the economy. As a result, fiscal deficits in a large number of countries have risen substantially, even to double digit numbers. This development has made some investors nervous, especially in combination with the substantial amount of monetary policy stimulus. As a result, investors have bought gold.”

“The technical outlook is positive. Investors saw every dip in gold prices as a buying opportunity. Now the psychological resistance of $1,800 per ounce has been surpassed and the all-time high at $1,921 has been taken out. Above that the important psychological level of $2,000 per ounce is within reach.”