Analysts generally expected the gold price to slip later this year, but now it looks like some of the factors that were likely to hit then have been moved up. Gold tumbled below $1,800 an ounce, and now RBC Capital analysts have slashed their outlook for the gold price for this year and next.
Analyst Christopher Louney cut his base case for the gold price from $1,810 to $1,732 per ounce this year and from $1,785 to $1,695 next year. He reduced his bear case from $1,695 to $1,654 for this year and from $1,618 to $1,576 next year. His bull case for gold remains unchanged.
Louney’s revisions are due to the weakness that he had not expected until later this year. Sentiment around the yellow metal has deteriorated, as have shorter-duration tactical price prospects. He believes investors looking for near-term tactical gains should sell, which is already occurring.
The analyst believes gold is pricing based on the rate of change among relative macro headwinds rather than on the absolute levels being especially negative. He noted that interest rates are rising but remain low, and the U.S. dollar is stronger but still weak on a year-over-year basis.
Louney does still see some positives for gold. He believes physical and consumer demand for gold will provide some support for the price. He expects demand sectors to recover from their 2020 lows due to price-responsive buying and strong economic growth.
Louney also said central bank demand increases in his forecasts, even if it doesn’t reach the highs seen in 2018 and 2019.
Is Gold Stickier This Time?
He believes the floor is closer to his base case than the ceiling because the factors required to reach his bull case are a greater departure from the current strong economic growth consensus. Louney also argues that the bull case requires uncontrolled inflation not seen in many years. He expects the tactical allocations to gold to keep declining, but he noted that the yellow metal’s position as a “longer-term risk overlay” remains. Thus, he believes gold will be able to maintain some of the allocations made last year even as sales continue.
Louney explained that part of his previous base case for gold was that it would remain stickier than it did in past cycles because the metal proved its worth in portfolios last year. However, he shifted his base case lower because that turned out to be only true to some extent amid the economic growth and stimulus measures.
He said there were either more short-term tactical gold allocations than he had thought that have now been sold or fewer risk overlay allocations that he had expected to stick around than what actually did in the recent outflows. So far this year, the market has retraced much of the gains from the second half of last year as three of the last four months saw outflows.
That means well over 100 tons have been sold, much more than Louney had been expecting by this time. He revised his forecast closer to 200 tons for this year. However, he continues to believe that gold has picked up a larger share of portfolios amid last year’s rise, and this year and next, he expects some of those investors will hold onto the metal as a risk overlay.
Louney noted that gold has always performed better as a long-term trade, and investors continue to see a need to maintain a hedge on their portfolio. They will still see a need for a hedge even if equities continue to soar, yields rise, and investors looking for short-term price appreciation move a significant amount of their capital elsewhere.
What About Inflation?
For the gold price to reach his bull case, Louney said there would have to be either a breakdown in the consensus view for economic growth or a “material amount of uncontrolled inflation.” He added that he thinks gold is unlikely to move higher, but if it does, he believes it will move much higher.
Inflation has historically been seen as a big positive for gold, but Louney disagrees, noting that the “data linkages are quite weak.” He explained that only in the more extreme examples of inflation does gold really take off. Unlike many others, he doesn’t think inflation will drive the gold price higher this year. Louney noted that extremely easy monetary policy has been in place since the Great Financial Crisis, but there hasn’t been any uncontrollable inflation.
Louney’s view regarding inflation and the gold price is non-consensus. It’s no secret that buying gold before inflation takes off helps protect wealth. If enough investors expect runaway inflation, then the gold price could take off as well.
Should We Expect Inflation?
FXempire argues that inflation is about to take off, pointing to shortages in many supply chains. The blog cited details from the Institute for Supply Management’s February manufacturing report. The organization explained that supply chains are depleted, and inventories “up and down the supply chain are empty.” Meanwhile, demand is increasing as the economy improves, and people have stimulus money to spend.
The institute describes things as “out of control,” adding that “everything is a mess, and we are seeing wide-scale shortages.” Labor shortages at suppliers are also raising prices, and the new-order log has increased 40% over the last two months. They added that they are “overloaded with orders and do not have the personnel to get product out the door on schedule.” Further, the institute said that “prices are rising so rapidly that many are wondering if [the situation] is sustainable.”
Many experts have been warning that the large amounts of stimulus that have been poured into the economy over the last year will result in runaway inflation. However, a growing number of voices says it’s absurd to think it will happen. The Federal Reserve has reassured consumers that inflation won’t occur as a result of the latest stimulus package, but as with anything else, the issue causes division along party lines.
With how many factors are driving gold prices lower right now, it is hard to imagine that inflation alone could push them much higher from where they are now.
On the date of publication, Michelle Jones did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Michelle Jones is editor-in-chief for ValueWalk.com and has been with the site since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Email her at Mjones@valuewalk.com.