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Gold futures have had a strong run of late, climbing 13% this year at a time when so many assets have nosedived due to the coronavirus pandemic.
Even compared with the stock-market SPX, +1.78% rally from the lows of late March, gold GC00, +2.41% has more than held its own, and was rallying again on Wednesday morning, rising nearly $40 to $1,727.40 an ounce.
Against that strength, it’s notable that Capital Economics is forecasting gold to fall back to $1,600 an ounce by the end of the year.
Oliver Allen, assistant economist at Capital Economics, said there have been two reasons behind gold’s strong performance. The first is the unwinding of the fire sales that hit all assets during the first half of March.
The second reason for gold’s rally, Allen says, was the massive policy support from the Fed, which pushed down nominal Treasury yields TMUBMUSD10Y, 0.603% and led to a recovery in investors’ expectations for inflation.
But Allen’s less enthusiastic about gold’s future. He points out that, after the global financial crisis, gold was one of the best assets from 2009 to 2011. By contrast, there is less scope for real yields, known as the inflation-adjusted rate, to fall by anywhere near the same extent from here.
While the firm is forecasting 10-year inflation compensation to recover a bit more from its recent trough of 0.5%, it said the rise will be small.
“What’s more, the rebound then was driven by a view that the Fed’s unconventional easing might push up inflation significantly. We doubt that investors are as worried about that risk today, given the low inflation during the last decade. And the pandemic is likely to be disinflationary in the near-term at least,” said Allen.
