Gold hit by rising real rates
The Fed’s hawkish shift at its June meeting has pushed real rates higher and weighed on inflation expectations, penalising the gold price. We expect US long-term real rates to continue to rise in the coming months, mostly due to a less accommodative Fed and strong US economic activity. Our central scenario is for the Fed to announce the tapering of its QE programme at the Jackson Hole meeting in late August. If we take the Fed’s 2013 QE tapering as a reference, this could lead put further upward pressure on real rates (although we do not expect real yields to rise to the same extent this time), weighing on the gold price through lower investment demand. In addition, we believe gold will be penalised by the dollar’s strength in the short term.
Beyond investment demand, seasonal and price-sensitive jewellery demand may provide little support for gold in the summer months, although the reopening of major economies may mitigate the seasonality of jewellery demand this year.
To sum up, we remain cautious on gold over the coming months, despite the sharp correction that we have been seeing. Having already declined to our three-month target of USD 1,780 per troy ounce, we expect the gold price to move further down towards our six-month target of USD 1,700.
However, our central forecast for real US rates to move up towards -0.1% by the end of the year means there is a risk that gold falls below our six-month price target. Yet this risk could be offset by the chance that the rise in real yields triggers higher global risk aversion and the constraints on the Fed’s tightening cycle posed by the huge pile of public and private debt built up in the US economy. Overall, real rates in the US are likely to stay low for an extended period of time, helping support the gold price. Our 12-month projection stands at USD1,840 per troy ounce.