Economists at Citin say that gold could reach $2100 an ounce during this quarter and $2300 in the next 6-12 months. A price of $3000 an ounce is also considered possible.
CNBC, Vicky McKeever
7.8.2020
Gold reached a peak price of $2000, and Citigroup economists have analyzed the reasons for the price increase and its potential impacts.
The spot price of gold, which at the time of writing this article is $2,058 per ounce, has risen over 4% in the past week and has seen consecutive increases for nine weeks, marking the longest continuous rise since 2006.
Investment bank Citi's economists say in a statement that expectations are as high as $3000 per ounce, and for this quarter, the price is believed to rise to $2100, with a forecast of $2300 per ounce over the next 6-12 months, "with the risk that these levels may also be exceeded."
They clarify that the gold price rally was not a warning sign of an "inflation surge" as one might assume, despite the central bank's stimulus and the private sector's increased borrowing.
“Microtheories of labor and product markets have replaced monetary theory regarding inflation, and the inflation risk for market pricing is low,” economists led by Catherine Mann say. “In other words, the price of gold does not signal inflation.”
The rally was not a sign that the dollar would lose its crown as the "primary international reserve currency."
Economists said that although some have suggested that the price of gold will follow the weakening of the dollar, "no other currency or country is ready or willing to take on the dollar's role." In fact, the US Fed's "massive dollar supply" at currency exchange points in various countries – also known as the exchange line – reinforces its position as the world's reserve currency.
“Although the dollar is now worth less in gold, so are the currencies,” they said, meaning that the dollar’s “exceptional special status remains.”
The core message of economists is that the rise in gold was due to the easing of monetary policy by central banks, which has led to negative real returns. This occurs when the returns received by investors are the same as or lower than inflation. This has reduced the "opportunity costs of zero-coupon assets like gold."
However, they add that all the factors mentioned above and many others have an impact on the continuation of the gold price rally.
Guy Foster, the chief strategist at Brewin Dolphin, is on the same page that the rally in gold prices is driven by negative interest rates. This indicates "market expectations about where inflation is heading in relation to where interest rates are going," he told CNBC's Squawk Box Europe on Friday.
“And this change indicates that the Federal Reserve and other central banks cannot raise interest rates due to high unemployment, even if inflation begins to rise,” Foster adds.
He said that it is reasonable to expect inflation to rise to around 3%, which is “the best for investors enjoying real returns below 3%.”
“In that situation, gold could be expected to perform extremely well,” Foster adds.
This article is a direct translation of CNBC's from an English-language article.
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