Gold price has another 4% to fall by year end – Capital Economics

NEW YORK (July 12)  The gold market continues to struggle following last week’s major selloff, and one firm warned investors that there is still more downside potential for the precious metal.

In a report published Monday, Kieran Tompkins, commodities economist at Capital Economics, said that he sees gold prices ending the year 4% lower from current prices with a year-end target of $1,650 an ounce.

Rising real yields point to lower gold prices through the second half of the year, said Tompkins, adding that gold prices have fallen 15% from the March highs. The comments come as gold prices continue to test long-term support around $1,730 an ounce.

“While the price of gold has fallen sharply over the past couple of months, including another small decline today, it still appears much higher than its typically strong inverse relationship with the yields of longer-dated US TIPS would suggest. We suspect that the gold price will fall further from here, as the usual relationship with TIPS yields partially reasserts itself,” Tompkins said in the report.

The gold market started the year on a strong note as investors looked to protect themselves against an unprecedented rise in inflation. However, Tompkins noted that inflation fears have recently receded and been replaced by recession concerns.

“We highlighted a few months ago that one of the pillars behind gold’s earlier resilience may have been worries about high inflation. But these concerns have eased in recent months, with a big drop back in 5-year/5-year forward inflation expectations roughly mirroring the decline in the gold price,” he said.

As of Friday, the 5-year/5-year-forward breakeven inflation rate was trading at 2.62%, its lowest level since the start of the year. Some analysts have said that breakevens need to stabilize to give the gold market a chance to form a bottom.

Along with rising real yields, Capital Economics expects a strong U.S. dollar to remain a headwind for gold. The British research firm said the greenback should hit parity with the euro and eventually surpass it.