Despite the upturn in the global economic outlook following multiple coronavirus vaccine breakthroughs, gold’s bullish cycle will continue, according to analysts at Citi and Goldman Sachs.
The traditional safe haven asset hit an all-time high in August of $2,074.88 per ounce, amid fears that the coronavirus crisis looked set to continue indefinitely.
However, demand for the precious metal has dwindled in recent weeks, as promising news from a number of Covid-19 vaccine producers have bolstered hopes that an end to the pandemic could be in sight. Spot gold was trading down over 1.7% at just under $1,805 per ounce during afternoon trade in Europe on Tuesday.
Citi Head of Commodities Research Aakash Doshi said in a note that he expected vaccine news to slow, but not end, gold’s secular bull cycle, suggesting it was “inevitable” for prices to revert back above $2,000 in 2021, as long as U.S. monetary policy did not take an unexpectedly hawkish turn. Gold last traded above this level in late August.
Citi expects gold to end 2020 at around $1,900 per ounce, a 22.5% increase on the start of the year. Doshi noted that this was 2.5 percentage points higher than average annual returns during the multi-year gold bull cycles of, for example, 1971-1980, 2001-2007, and 2009-2012.
Doshi also highlighted that offset against consumer price index (CPI) inflation, gold prices in real U.S. dollar terms were still 30-35% below their 1980 peak.
With the U.S. Federal Reserve expected to hold interest rates near zero, keeping real yields suppressed, there is scope for further bullion gains, Doshi said, despite prices softening since August as “speculative traders” focused on weekly or monthly trends.
“However, for long-term value buyers that may be more price inelastic in the short-run, the constructive consecutive quarterly return profile for gold in the current bullion market regime (e.g. since 4Q′18) is among the most robust in five decades,” he said.
“This has brought new asset allocation into gold from non-traditional players such as family offices, insurance firms, and pension funds.”
Dollar depreciation and EM demand
Weakness in gold demand in recent weeks comes on the back of a steep decline in official sector purchases, weak buying activity from Exchange Traded Funds, and a jewelry market recession deeper than that seen during the global financial crisis.
Doshi suggested, however, that U.S. dollar depreciation coupled with an anticipated rebound in emerging market demand could be the next catalyst for investor inflows into gold. Citi has set a six- to 12-month point-price target of $2,325 per ounce, “comparable to the return distribution profiles during the prior two gold bull cycles this century.” The bullish case, assigned a 25% probability, sees gold breaking through $2,700 per ounce over the same time horizon.
Goldman Sachs echoed this sentiment in a recent note reiterating their target price for gold in 2021 at $2,300 per ounce, citing an expected recovery in emerging market demand and further falls in U.S. real interest rates.
Goldman analysts also cited a recovery in developed market demand based on “concerns over currency debasement and recovery in retail purchases.”
“In our view, the most recent move (lower in gold prices) looks disproportionate relative to the changes in U.S. 10-year and 5-year real rates and is likely explained by the large rotation towards value from defensive assets such as gold and long term growth stocks,” Goldman analysts Mikhail Sprogis and Jeffrey Currie said in the note.
“In our view the structural bull market for gold is not over and will resume next year as inflation expectations move higher, the U.S. dollar weakens and EM retail demand continues to recover.”
Sprogis and Currie did suggest that gold might struggle for upward momentum in the near term, however, with a rally in U.S. 10-year rates already reaching levels projected by the bank for the first quarter of 2021.
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