Gold - not a flash in the pan


Gold has been suffering from the increase in real yields, but we remain positive on its prospects over the medium term.

Since the end of September, there has been upward pressure on the US 10-year yield, exacerbated lately by positive news on the vaccine front. As inflation expectations in the US have largely stabilised at close to pre-crisis levels, the US 10-year real rate has risen, hurting the gold price. Investment demand for gold is particularly sensitive to this driver, while other types of demand have also been weak recently (the official sector was a net seller in Q3, something not seen since the end of 2010). Furthermore, as the appearance of multiple efficient vaccines will likely strengthen economic recovery, defensive assets such as gold may lose some of their appeal to short-term investors.


But while lower global uncertainties and upward pressure on rates are negative factors, we do not think the long-term bull trend in gold price is over  given the massive injections of liquidity by central banks, which could lead to a broad depreciation of fiat currencies relative to real assets such as gold. Furthermore, the Federal Reserve’s (Fed) new “flexible average inflation targeting” framework and its focus on keeping high debt levels manageable point towards negative long-term real rates.


As such, while we acknowledge that the outlook for gold has deteriorated somewhat in the short term, we think that most of the US Treasury yield curve may stay negative in real terms for some time. Given worsening US budget deficits and the US dollar’s long-term overvaluation, we expect global managers to renew allocations to gold given its lack of credit risk and proven track record as a store of value. Other types of gold demand are likely to improve too, offsetting the probable erosion in investment demand (which has been at record levels since the start of the year). With the ongoing economic recovery, jewellery demand should improve, especially in China, which represents roughly 30% of this type of demand. Furthermore, the rationale for reserve managers at central banks to own gold remains strong.


In short, low yields are set to last for some time, especially given the Fed’s new policy framework and the medium-term disinflationary shock caused by the pandemic. With the US dollar set to weaken, the gold price should rise again, although likely at a slower pace than in the past few years.


We have lowered our projections to reflect recent developments. Our three-month forecast has been reduced to USD1,930 (from USD1,970) per troy ounce, while our six-month and 12-month projections have moved to USD2,050 (from USD2,100) and to USD2,150 (from USD2,250), respectively.


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