The gold market continues to struggle after the big sell-off last week. One firm warned investors that there is still more downside potential for the precious metal. Here are the details…
Downside warning for gold
In a report released Monday, Capital Economics commodity economist Kieran Tompkins said gold prices will close the year 4 percent lower than current prices. He said he sees his year-end target as $1,650 per ounce. Tompkins added that rising real returns point to the decline in gold prices in the second half of the year, adding that gold prices fell 15 percent from the high in March. The comments come as gold prices continue to test long-term support around $1,730 an ounce. Tompkins says the following in the report:
While the price of gold has fallen sharply over the past few months, including another small drop today, it still looks much higher than its typically strong inverse relationship to longer-term US TIPS yields suggests. We suspect the gold price will drop further from here, as the usual relationship with TIPS returns is partially re-emerging.
Changes in inflation and recession concerns
The precious metals market had a strong start to the year as investors sought to hedge against an unprecedented rise in inflation. But Tompkins said fears of inflation have waned recently. He noted that it was replaced by recession concerns. Tompkins used the following statements:
We highlighted a few months ago that one of the pillars behind gold’s earlier resilience could be concerns over high inflation. However, these concerns have eased in recent months. The large drop in 5-year forward inflation expectations roughly reflects the decline in gold price.
On Friday, the 5-year/5-year forward breakeven inflation rate was trading at 2.62 percent, its lowest level since the start of the year. Some analysts said the breakevens need to stabilize to give the precious metals market a chance to bottom out. Alongside rising real returns, Capital Economics expects a strong US dollar to remain a headwind for gold. The British research firm said the dollar should reach parity with the euro and eventually surpass it.
