Gold appears set to remain well-supported due to historically low interest rates, quantitative easing, and fiscal and political concerns, despite optimism that the U.S. economy will recover quicker than expected.
Gold slipped as the dollar rose on September 17 after the Federal Reserve (U.S. central bank) signalled it expected the recovery of the world’s largest economy to accelerate, with joblessness falling faster than its forecast in June.
When the dollar rises, dollar-denominated gold becomes more expensive in other currencies.
Gold was off 0.85 percent at $1,944.17 per ounce on September 17.
In a report published on September 15, commodity analysts at CIBC published their gold and silver forecasts for the rest of the year into 2021.
The analysts said that they see gold prices averaging the third quarter around $1,925 an ounce. The average goes up to $2,000 for the fourth quarter.
Looking ahead, CIBC sees gold prices averaging $2,300 an ounce in 2021, $2,200 an ounce in 2022, $2,100 in 2023 and $2,000 an ounce in 2024.
The outlook for continued low real interest rates, increasing government debt burdens coupled with geopolitical uncertainty arising from the upcoming U.S. election are all supportive of further significant price appreciation,” the analysts said.
Lawrie Williams, precious metals commentator with bullion dealer Sharps Pixley, wrote in September that he was bullish for the longer term gold price outlook, adding that he believed that share markets were overvalued.
Expectations for a continuing climate of low interest rates, combined with monetary stimulus from central banks, augur for underlying strength in gold prices.
Gold bears no yield, and thus benefits in competition against other assets when interest rates are rock bottom as they are now.
Meanwhile, the outlook for the pound remains weak against the dollar due to uncertainty over Brexit amid strained trade talks between the UK and EU, and due to fears of further social restrictions due to COVID-19.
The pound had its worst week in six months in the second week of September, as investors grew more pessimistic about the chances of a Brexit deal being reached before the December 2020 deadline.
Economic concerns weighed on the pound after data on September 15 showed that the UK’s joblessness rate rose for the first time since the coronavirus lockdown began in March.
If expectations of a quickening U.S. economic recovery take root, the dollar could strengthen further against the pound, increasing returns in sterling terms for UK-based gold savers.
Frequently asked questions
Why is the price of gold expected to remain well-supported in the long term?
Gold is expected to remain well-supported due to several macroeconomic factors, including historically low interest rates, ongoing quantitative easing, and fiscal and political concerns. Even with rising optimism regarding a fast economic recovery in the United States, these underlying conditions provide a strong foundation for the precious metal.
Furthermore, because gold bears no yield, it becomes highly competitive and benefits significantly when compared to other assets during periods when interest rates remain at rock-bottom levels. Analysts also point to rising government debt burdens and geopolitical uncertainty, such as those arising from major political elections, as key elements that are highly supportive of further price appreciation. Additionally, some precious metals commentators believe that current share markets are overvalued, which historically redirects investor interest back toward gold as a safe-haven asset.
What are the gold price forecasts for the rest of this year and beyond?
Commodity analysts at CIBC have published forecasts indicating a steady upward trajectory for gold prices through the end of the year and into 2021. For the third quarter, analysts project gold prices to average around $1,925 per ounce, with that average expected to rise to $2,000 per ounce during the fourth quarter.
Looking further ahead, the long-term projections see gold prices averaging $2,300 per ounce in 2021. After this peak, the analysts project a gradual, moderate decline over the following years, with average prices estimated at $2,200 per ounce in 2022, $2,100 per ounce in 2023, and eventually settling at around $2,000 per ounce in 2024. These forecasts are underpinned by expectations of continued low real interest rates and growing government debt.
How does the value of the US dollar affect gold prices?
The strength of the US dollar has a direct impact on the price of gold because gold is globally traded and denominated in dollars. When the US dollar rises in value, dollar-denominated gold automatically becomes more expensive for buyers using other currencies, which can lead to a temporary slip in gold prices, as seen when gold dipped to $1,944.17 per ounce on September 17.
Conversely, a strengthening dollar can actually benefit foreign investors. For instance, if the US economy recovers quickly and the dollar strengthens against a weak British pound, UK-based gold savers could see increased returns when their gold holdings are valued in sterling terms. This currency dynamic plays a vital role in determining local investment returns.
What factors are currently causing weakness in the British pound?
The British pound is experiencing weakness against the US dollar primarily due to political and economic uncertainties. A major driver is the ongoing uncertainty surrounding Brexit, exacerbated by strained trade negotiations between the UK and the European Union, which has made investors highly pessimistic about a deal being finalized before the December deadline.
Additionally, fears of further social restrictions resulting from COVID-19 have weighed heavily on the currency. The UK economy is also facing domestic pressure, as official data showed the nation’s unemployment rate rising for the first time since the initial coronavirus lockdown began in March. Together, these compounding issues contributed to the pound suffering its worst week in six months during early September.
How does the economic situation in the UK benefit British gold savers?
The current economic difficulties in the UK, characterised by a weakening pound and rising unemployment, create a unique situation that can benefit domestic gold savers. Because gold is priced internationally in US dollars, any weakness in the British pound relative to the dollar changes the conversion value of the asset locally.
If the US economy experiences a faster recovery as projected, the US dollar is highly likely to strengthen even further against the pound. For UK-based gold savers, this widening currency divergence means that when they eventually convert or value their gold holdings back into British sterling, they can expect to see increased returns on their investment, sheltering their capital from domestic currency devaluation.
