(Wallace Refiners) The gold market is seeing a stark contrast between last year’s and this year’s price action as gold’s main drivers are now turning into obstacles, according to RBC Capital Markets commodity strategist Christopher Louney.
“We’re seeing the other side of what had been tailwinds turned into headwinds over the course of 2021,” Louney told Wallace Refiners.
In 2020, gold got caught up in a multi-year move higher, which was over-exaggerated due to COVID-19 dynamics. “That helped drive gold to new highs,” he said. “When we got into the beginning of this year, we had expected weakness.”
However, gold’s decline came sooner than expected, Louney pointed out. “Our most recent revision to prices is actually bringing forward some of the weakness that we had expected to happen later in the year.”
The reasons are the global growth dynamics, higher U.S. dollar, rising yields, and risk-on sentiment, which are all weighing on gold.
“The sort of grander dynamic of global growth itself isn’t particularly helpful for gold prices, regardless of some of the positives that do exist,” Louney said. “And even if we are to see a pretty sizeable resurgence of the consumer and physical demand, that’s not enough to change the outlook for prices in the short and medium-term.”
Louney added that his base-case outlook for gold is neutral to slightly lower for the rest of the year. “Putting aside inflation concerns, we’re just set up for a period where it’s neutral to weak for gold.”
Investors are currently paying close attention to strong growth expectations, equity performance, and increasing rates. “The theory behind keeping such a large allocation to gold as last year is not strong in this environment. That’s what we’re seeing play out, not just in prices but also in the flows in the ETF space,” Louney noted.
For Q2, Louney expects to see gold at $1,726 on average, which is around where gold is currently trading. At the end of the year, the Q4 average forecast is at $1,694. “There is not a ton of downside. But we think it’s neutral to negative over the course of the year,” Louney explained.
Chance at $2,000 by year-end?
There is a chance for gold to jump to $2,000 an ounce by the end of this year, but it would require uncontrollable inflation, which Louney is not projecting.
“If we are to have the type of scenario where we have uncontrolled inflation. In that world, the over-appreciation of economic strength would definitely push us to our highest scenario, which sees gold at $1,978 on average for 2021.”
However, this runaway inflation is looking unlikely at the moment, according to Louney.
“The type of inflation that we need would have to be uncontrolled, unexpected, and quite large for that to really be the primary factor that would propel gold to a totally higher level,” he said. “We don’t expect that.”
Louney’s base-case estimates some inflation narrative that would be just enough to keep gold flows secure but not kick off a new buying spree.
“We’ll see some allocations on the back of that, but it’s not a game-changer for prices simply because we just don’t anticipate the type and extent of inflation that we think would be necessary to change gold’s price outlook,” he explained.
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