Recent data have highlighted the strength of the rebound in physical demand for gold, especially in India and China. But strategists at Capital Economics don’t think this poses much of a risk to their forecast for the gold price to fall this year.
Gold to drop back to $1,600 by the end of this year
“Consumer demand has historically been strong after a period of falling prices, reflecting the more price-sensitive nature of these purchases. The upshot is that consumer demand for gold responds to changes in the price (often driven by external factors) much more than the gold price responds to changes in consumer demand. So the recent rise in consumer demand is a symptom of a lower gold price, rather than a reason to think it will rise again.”
“Some of the increase in India’s gold imports in March appears to be due to temporary factors that should fade, rather than a longer-term shift. Imports may have been boosted by seasonal stockpiling and delayed purchases from earlier months given expectations for a cut to gold import duties, which was announced in February. In any case, the worrying resurgence in virus cases in India will probably also depress gold demand in the near term.”
“Two other factors, namely US real yields and the US dollar, are much more important drivers of the price, and we expect both to weigh on the price of gold over the next year or so. We think the recent rise in longer-term real yields in the US will resume before long, which would increase the opportunity cost of holding gold. Meanwhile, we also anticipate that a stronger US dollar will make gold more expensive to non-US investors.”