It seems that investment demand has been largely indifferent to the decline in real rates since the Fed’s hawkish shift in June. ETF gold holdings, a key factor in investment demand, would seem to back this view, having declined slightly in July. The lessening sensitivity of the gold price to a decline in real rates might be due to investor reluctance to increase their gold exposure just as the Fed gears up to taper its asset purchases. Given our central scenario of a moderate rise in US 10-year real rates, we do not expect ETF demand to be particularly strong in the coming months. More generally, while we acknowledge that low real rates should support gold, the scope for significant improvement in investment demand looks limited, with purchases of bar and coins weak in Q2.
Our conclusion is similar when it comes to official demand. Net purchases of gold by central banks was very strong in the first half of the year, with significant amounts bought by central banks (in Brazil, Thailand and Hungary, for example) that had not been particularly active in the past. But they may not be so present going forward and the absence of structural buyers like Russia, China and Turkey, we could see official demand retreat in H2.
Jewellery demand has recovered since 2020 below pre-pandemic amounts But jewellery demand is very sensitive to gold affordability. It thus tends to lag changes in the gold price, so it is not a useful indicator of the future direction for prices.
Overall, we think that the gold price is likely to move more or less sideways in the next few months. While a moderate rise in US long-term real rates and a possible ebbing of official demand should weigh on gold prices, our expectation that real rates will remain persistently low should maintain gold’s attractiveness as a reliable store of value. Also, because of concerns about inflation and possibly rocky policy normalisation, large injections of liquidity by central banks still favour real assets such as gold over fiat currencies.
Overall, our three-month forecast for gold is USD1,700 per troy ounce. Our six-month forecast is USD1,780 and our 12-month forecast stands at USD1,840.