Gold’s upside move has just begun

Inflation, currency debasement, and a significant shift in asset allocation strategies will offset the negative impact of higher US rates on gold prices, the World Gold Council said in a research report.

Combined with attractive entry levels, this could prompt strategic investors to add gold to portfolios as well as support central bank buying in the second half of 2021, WGC analysts said in their mid-year outlook report.

“However, while consumers may also benefit from the economic recovery and the recent price pullback, new Covid variants may limit the uptake in gold jewellery in key markets,” it said.

“Gold’s upside move is only just beginning,” Goldman Sachs analyst Mikhail Sprogis said, adding prices are finally catching a long-awaited bid as inflation fears have subsided. the upside move is only just beginning.

Sprogis reiterated his $2,000 an ounce price target on gold prices in a new research note this week, voicing optimism amid the backup in Treasury yields and easing inflation concerns.

"In a scenario where the global economic recovery does not play out as expected or inflation begins to move materially above expectations, we see material upside to gold given its undervaluation and low allocation from the investment community. Therefore, we think that gold may be a good strategic purchase here for portfolio managers looking to hedge against tail risks of macro volatility," said Sprogis.

"In our base case that the global recovery continues uninterrupted and inflation remains subdued, we expect this discount to persist and see just modest upside to gold, driven by only a small increase in real rates and a continued improvement in EM wealth," Sprogis argues.

On Thursday, gold rallied over $15 from the daily swing lows and moved back above the $1,810 level, or closer to multi-week tops during the early European session. Worries about the economic fallout from the spread of the highly contagious Delta variant of Covid-19 took its toll on the global risk sentiment. This was evident from a steep decline in the US equity futures, which provided a goodish lift to the traditional safe-haven asset – gold.

The risk-off flow was reinforced by an extension of the steep decline in the US Treasury bond yields.

“Interest rates will likely remain key drivers of financial assets. Gold is no exception,” the WGC report said, noting that the first half of 2021 proved to be a good example on how its diverse sources of demand and supply interact. The gold price dropped by more than 6.0 per cent in H1,1 as gains during most of Q2 were thwarted by a significant pullback in late June. Gold’s price also underperformed in most key currencies except for the Japanese yen and the Turkish lira, as these weakened against the US dollar.

“Overall, gold’s performance was driven primarily by higher interest rates – especially during Q1 and then again in late June on the back of a more hawkish than expected statement by the US Federal reserve. It was also aided by a more upbeat investor sentiment as the global economy started to recover from the impact of Covid-19 in 2020,” the WGC report said.

However, there were also supporting factors for gold. Concerns of higher inflation offset part of the drag that interest rates brought. And the strong response from governments to aid in the economic recovery through monetary and fiscal policies have made some investors worried about currency risks and capital preservation, the WGC said. — issacjohn@khaleejtimes.com

Issac John

Editorial Director of Khaleej Times, is a well-connected Indian journalist and an economic and financial commentator. He has been in the UAE's mainstream journalism for 35 years, including 23 years with Khaleej Times. A post-graduate in English and graduate in economics, he has won over two dozen awards. Acclaimed for his authentic and insightful analysis of global and regional businesses and economic trends, he is respected for his astute understanding of the local business scene.