Capital Economics Predicts Gold Prices to Drop to $2,200 by Year-End Despite Recent Surge

• Recent developments in the gold market have seen prices reach an all-time high, sparking significant interest and speculation.
• Many analysts are predicting that these prices could continue to rise, although there are notable dissenting opinions.
• One such perspective comes from Capital Economics’ Climate and Commodity Economist Assistant, Hamad Hussain, suggesting a potential price drop by year-end.

Gold prices hit historic highs as Fed expectations shape market outlook.

Gold Market Reaches Unprecedented Highs

Gold prices have surged to historic levels, driven primarily by expectations of upcoming Federal Reserve interest rate cuts. This rise to all-time highs has captivated investors and analysts alike, who are closely monitoring market movements. Currently, gold is trading near this peak, reflecting the heightened anticipation in the market.

Capital Economics’ Projection for Year-End Prices

Hamad Hussain from Capital Economics predicts that the recent high prices represent the zenith for this year, and we might see a drop to $2,200 per ounce by the end of the year. This forecast is based on the assumption that high prices will dampen retail demand in crucial global markets, with China being a focal point. High gold prices might deter consumers from maintaining the aggressive buying pace witnessed in the first half of the year.

Impact of China’s Gold Demand

Despite a pullback from daily highs, gold prices have seen an approximately 19% increase since the start of the year. August gold futures were recently trading at around $2,467.90 per ounce. Hussain notes that China’s robust demand has been a significant driver of higher prices this year. However, historically elevated prices are expected to eventually strain the price-sensitive Chinese market, potentially reducing demand.

The Fed’s Influence on the Gold Rally

Last week’s gold rally was further fueled by speculation that the Federal Reserve might cut rates by September. Hussain qualifies this rally as a “buy the rumor, sell the news” event, suggesting that while lower interest rates are often bullish for gold, much of this anticipated easing may already be priced into the markets. Hussain expects 10-year Treasury yields to fall from approximately 5% in October 2023 to about 4% by the end of 2024.

Jewelry Demand Amidst High Prices

In a separate report, David Oxley, Chief Economist for Climate and Commodities at Capital Economics, highlighted that jewelry demand, a key factor in the global gold market, is likely to falter amidst high price levels. While income growth in key markets may offset some demand destruction, jewelry demand is anticipated to remain at late 1980s levels. High real gold prices and easier access to gold through alternative means are expected to lead to a stagnant demand for gold jewelry in the coming years.

Conclusion

In conclusion, while gold has reached record highs, several factors could precipitate a downturn by year-end. Analysts like Hamad Hussain point to decreased retail demand in key markets such as China and pre-priced Federal Reserve rate cuts as primary influences on future gold prices. Investors should consider these dynamics when positioning themselves in the gold market, as high jewelry demand is unlikely to provide significant support moving forward.