Gold prices are expected to hold firm this quarter as investors seek refuge from soaring inflation and risks such as the Ukraine war, before retreating later this year as interest rates rise.
Gold is traditionally seen as a safe place to invest during times of financial and economic uncertainty but, as it yields no interest, it tends to lose its attraction when interest rates rise.
The relationship has been complicated this time by fears that the aggressive pace of tightening signaled by the U.S. Federal Reserve to combat inflation may derail economic growth, which could bode well for gold.
“A geopolitical risk premium is likely to keep gold prices elevated short-term,” said Standard Chartered analyst Suki Cooper.
Earlier in January, Goldman Sachs had raised their 12-month gold price forecast to $2150 per troy ounce on the view that an impending US growth slowdown would lead to increased concerns of a US recession and incentivize 300 tons of inflows into gold ETFs.
At the beginning of the Russia Ukraine tensions, Goldman Sachs had suggested that the resulting rally in commodities could further deteriorate the developed market (DM) growth inflation mix, increase concerns of a US recession, and push gold ETF inflows to 600 tons and, in turn, push the gold prices to $2,350 an ounce in 12-months. This scenario, it said, is now becoming the base case.
In the second half of 2022 (H2-CY22), Goldman Sachs expects the gold demand by central banks to reach its historically high level as they globally have both strong diversification and geopolitical reasons to shift reserves into gold.
“We expect that by the second half of 2023, global central bank demand hits a record 750 tons annual rate versus 450 tons in 2021. This, together with an upward revision in our ETF build forecast should push year-end gold prices to $2500 per troy ounce,” the note said.
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