Gold feels the pain
Our new base scenario for US long-term rates is causing us to revise our projections for the gold price. We have adjusted our central scenario for US rates at the end of this year to reflect recent movements (our central end-of-year projection for the US 10-year Treasury yield has been raised to 1.7% from 1.3%, with skewed to the upside), so we are lowering our three-month forecast to USD1,800 per troy ounce versus a previous target of USD1,950 and our six-month and 12-month projections are now both set at USD1,900.
Any additional rise in long-term nominal rates in the US could be fuelled by further rises in real rates as we see limited upside potential for inflation expectations, causing a significant challenge for gold. The recent rise in real 10-year rates in the US has already weighed on the gold price significantly. Just as the decline in US real rates in 2019 and 2020 (from 1.16% in November 2018 to -1.1% in August 2020) helped the performance of gold, so the subsequent stabilisation and rise in real rates has hurt. The fast pace of inoculation and the effectiveness of vaccines against variants could speed the reopening of the US economy, which could put additional upward pressure on long-term real rates, and there is a risk that the market continues to challenge the Fed’s dovish stance in the absence of stronger pushbacks. Also, a further rise in the short end of the curve would likely support the US dollar.
Beyond investment demand, central banks demand may also remain rather weak in the first half of the year, with Russia and Turkey failing to add to their gold holdings lately. Furthermore, for seasonal reasons, jewellery demand tends to be weak in the first half of the year. We may have to wait for the second part of 2021 and the reopening of major economies to see jewellery demand reacting to lower gold prices.
However, we maintain a relatively bullish stance over the medium-to-long term on the yellow metal as we think market expectations for rate hikes are likely to be pushed back by several quarters. The strength of the US dollar will also prove temporary in our view given the Fed’s constantly re-iterated dovish monetary stance coupled with a robust global growth outlook and the US’s twin deficits. We continue to see gold as an attractive hedge against unforeseen market events, especially in an environment where Modern Monetary Theory gains traction.