A key factor that supports the outlook for the precious metal, according to the former Reserve Bank economist, is the risk of rising inflation, which is one of two inputs into real yields, the leading indicator of gold prices.
“It’s amazing that during this downturn that we’ve seen, we haven’t actually seen any economy in trend terms go into deflation,” Mr Boey said. “We’ve had prices drop from month to month, but not year-on-year.”
Rather, Mr Boey said because the pandemic has seen central banks print money to deal with the fallout after interest rates were lowered as far as possible, there is the risk of higher inflation in the medium term.
“You really do have too much money chasing too few goods,” he said.
Commonwealth Bank commodity analyst Vivek Dhar also expects the price of gold to continue to rise, but believes the tailwind provided by inflation expectations will ease as the rebound in crude oil prices slows.
Analysis from the bank shows the continued slide in real yields over the last two months have been driven by rising inflation expectations rather than falling US government bond yields, the second driver of real yields.
The expected level of inflation started rising when crude oil prices began to recover sharply from late April, Mr Dhar explained. But with the CBA analyst expecting energy markets to rebound only slowly from here, inflation expectations are expected to ease.
“We think the gains from here are going to be more challenging,” Mr Dhar said.
Commonwealth Bank’s forecast is for the gold price to peak at $US1875 an ounce and sees the metal taking almost two years to reach that level.
But that could happen quickly, Mr Dhar said, with COVID-19 cases rising sharply in the US increasing the chance of further central bank support.
“If COVID-19 worsens, and we see the [Federal Reserve] come in and backstop more growth and even consider negative rates, that would be a big positive for gold. And if [the Fed] ever went down that path, then we’re talking north of $US1800, we’re $US2000,” he said.
“What you’ve got to keep an eye on is how much will the Fed come in and backstop growth and keep the economy afloat by pumping in more money and more debt.”
In the US, the number of confirmed cases has passed 3 million—meaning nearly one in every 100 people has been confirmed as infected—and the number of deaths is more than 132,000.
President Donald Trump remains determined to reopen America’s schools despite worries about the virus, and on Wednesday threatened to hold back federal money if school districts don’t bring their students back in the fall. He complained that his own public health officials’ safety guidelines are impractical and too expensive.
A growing chorus of public health experts are urging US officials to reconsider how they are reopening the broader economy, and to prioritise schools. That effort that will likely require closing some other establishments like bars and gyms to help curb the virus…