By Kevin Martine
As gold prices reached a seven-year high of US$1,600 per ounce this week, some analysts are predicting the start of a new bull market for the precious metal.
Analysts at Citibank Group Inc. believe prices could hit US$2,000 per ounce in the next year.
Fears over interest rate cuts by central banks, as well as economic headwinds caused by the coronavirus, could cause investors to hedge stock market risk by buying gold, Citibank said in a note Wednesday.
“While negative real yields are also supportive for equity markets, gold can further outperform on a risk market unwind should coronavirus risks impact supply chains and thus U.S. earnings momentum,” Citibank said.
“We still expect fresh nominal highs of US$2,000 per ounce to be breached in the next 12 to 24 months.”
Spot gold was up 0.3 per cent to US$1,606.44 per ounce.
Other analysts concur that higher prices are here to stay.
“Gold has entered a new bull market and begun to internalize geopolitical, political, trade and growth risks, which is a constructive new development, compared to its responsiveness over the previous six year bear market,” said Nicky Shiels, Metals Strategist at Scotiabank, in a research report last month.
Shiels predicted an average price of US$1,600 over the next year, with a trading range between US$1,500 and US$1,700, and noted that political risks are high this year.
“Political/geopolitical & trade risk remains underpriced; that is especially important into 2020, as election risk rises, the business cycle matures and the frequency of off-calendar geopolitical events likely remains high,” Shiels said.
But there are some risks that remain that could keep prices down, particularly if Asian economies decline.
“Slowing physical demand in Asia, especially jewelry sales, which still take down roughly 45 per cent of annual world supply, is a bearish risk for bullion,” the Citibank report said.
Shiels also noted risks, suggesting that a reduction in stock market volatility as well as the prospect of more stable global trade could keep demand low.
“Chinese physical investor interest has also suffered large losses in the second half of 2019 due to concerns over further yuan depreciation moderating given trade de-escalation and the phase one deal,” Shiels said.
“The uncertainty regarding when the global supply chain will return to normal is likely to continue to squelch trader and investor risk appetite for at least the near term. That’s bullish for the precious metals markets,” Kitco Metals senior analyst Jim Wyckoff said in a note.
Reflecting positive investor sentiment towards bullion, holdings of the world’s largest gold-backed exchange-traded fund, SPDR Gold Trust, rose to their highest since Nov. 11, 2016 on Tuesday.
With a file from Reuters
Financial Post