Expectations that the Federal Reserve will introduce yield curve control measure in September will continue to support gold prices through the first half of 2021. Still, gold’s gains will be limited as inflation pressures remain muted, according to one international bank.
In a report published Wednesday, Bernard Dahdah, head of precious metals research at Natixis, increased his price forecast for gold, saying that the yellow metal could hit $1,950 an ounce by the second quarter of next year.
The comments come as the gold market holds near their highest level since 2011 as the price pushed above $1,800 an ounce.
He said that yield curve control, coupled with inflation, would push real interest rates into negative territory, making gold an attractive safe-haven asset.
“However, we do point out that inflation is unlikely to be considerably elevated (reaching a high of 2.2% in Q2 2020) hence putting a break at how low real yields can get,” he said.
While the global central banks have pumped massive amounts of liquidity into financial markets to stabilize the global economy, Dahdah said that the next step for central banks is yield curve control.
“Without yield curve control, the danger is that forward-looking financial markets, prematurely discount a recovery thus leading to a risk-on market swing, lifting borrowing rates for the Treasury and private firms,” he said.
He added that because of the economic impact of the COVID-19 pandemic, the global economy will be in a fragile state for a longer-than-expected period.
However, the economic conditions that are supporting current monetary policy and weighing on economic growth will also weigh on inflation, which Dahdah said will impact gold.
“In our view, we do not expect to see inflation dramatically rise on the back of today’s important monetary and fiscal policies, as such we do not expect to see a drastic drop in real yields even if a yield curve control is introduced. The link between money creation and inflation in today’s economies is broken,” said Dahdah.
While Natixis is bullish on gold for the next 12 months, Dahdah said that the precious metal’s performance could start to weaken in the second half of 2021.
“Rising yields during the second half of 2021 should drive gold prices lower, especially if the pandemic is finally brought under control,” he said.
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