Gold To Fall To $1,270; Higher Real Interest Rates To Blame - Capital Economics
(Kitco News) - While gold has seen its best week in two years, oneU.K.-based research firm expects that the rally will not be sustainable,looking for prices to fall nearly 6% from current levels by year end due torising real interest rates.
Capital Economics said in a recent report that although goldis traditionally a good hedge against inflation -- as the yellow metal rises inconjunction with consumer prices -- the impact of inflation would be offset by ratesrising at a faster pace.
“In our view, the positive impact on gold prices from higherdemand for inflation hedges could be more than offset by rising real interestrates,” the report said.
In the report, the firm reaffirmed its forecast that goldprices would end the year at $1,270 an ounce, down 5.9% from Friday’ssettlement price of $1,349.90 an ounce.
Gold has historically been inversely related to realinterest rates, but the firm noted, there has been a widening divergence inthis correlation ever since the December 2017 Fed meeting. Gold has sincerallied despite persistent downward pressures on real rates, making the yellowmetal appear overvalued.
The report added the as the economy heats up, the Fed wouldhave to adopt a more hawkish stance and hike rates “significantly beyond theirneutral level in order to limit the increase in inflation.”
The other factor driving gold prices up is a depreciatingU.S. dollar, the report said. The dollar and gold have consistently held astrong negative correlation as the two are often seen as substitutes.
The FOMC stumped more hawkish analysts this week by forecastingonly three rate hikes this year, sending the U.S. dollar lower and in turnboosting gold prices higher. However, Capital Economics doesn’t expect thedollar to depreciate further this year, meaning gold could lose support from amajor tailwind factor.
The report said that lingering geopolitical tensions couldoccasionally counteract gold-bearish forces. “To be sure, heightened geopoliticalrisk could, at times, give some support to the gold price and was probably afactor behind its resilience in recent weeks,” it said. “But ultimately, wethink that the balance of risks for gold prices lies to the downside this year.”
By David LinFor Kitco News
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