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Gold prices can shoot up to $3,000 per ounce (oz) – up a massive 78 per cent from the current level of around $1,689/oz – as investors become risk averse in the backdrop of coronavirus (Covid-19) pandemic that has already pushed central banks across the globe unveil stimulus measures to help stem the economic malaise triggered by this health scare.
“As central banks and governments double their balance sheets and fiscal deficits, respectively, we have also decided to up our 18-month gold target from $2,000 to $3,000/oz,” wrote Michael Jalonen and Lawson Winder of BofA Securities in a recent report. Their 10-year average (2020-2029) price for gold and silver stands at $1,692/oz and $17.97/oz, respectively.
“As economic output contracts sharply, fiscal outlays surge, and central bank balance sheets double, fiat currencies could come under pressure. And investors will aim for gold. Hence, we mark-to-market our forecasts and now project average real gold price of $1,695/oz in 2020 and $2,012/oz in 2021,” Jalonen and Winder said.
Beyond real rates, BofA Securities believes, variables such as nominal gross domestic product (GDP), central bank balance sheets, or official gold reserves will remain the key determinants of gold prices. However, a strong US dollar (USD), reduced financial market volatility, and lower jewellery demand in India and China could remain as the key headwinds for the yellow metal.
Key interest rates in the US and most G-10 economies, BofA believe, will likely be at or below zero for a long period of time, as central banks attempt to push inflation back above their targets. That said, it expects the US GDP to dip 30 per cent year-on-year (YoY) in the second quarter of calendar year 2020 (Q2-2020) – the steepest drop in modern history. “Other countries like Japan will likely experience a 21.8 per cent decline in output in Q2-2020, while China just reported a contraction of 6.8 per cent in 1Q20,” they said.
If 2019 ended well for gold with a rise of 20 per cent in prices, 2020 has started on an even optimistic note with prices hitting a seven-year high of over $1700/oz. The uncertain impact of Covid-19 on the global economy led to a sharp fall in equity markets, commodity markets along with depreciating currencies leading investors to scout for relatively stable asset class, analysts say.
“With major global central bankers already lowering rates significantly, further scope for a reduction in rates is either not there or very limited. This limits expected bond returns, going forward. Accordingly, gold may become an attractive and more effective diversification, resulting in a higher portfolio allocation,” says Sachin Jain, an analyst tracking the yellow metal at ICICI Securities.
In his January 2020 note to investors, Christopher Wood, global head of equity strategy at Jefferies, too, had maintained his bullish stance on gold with a price target of $4,200/oz.
“This is because the view here remains that central banks, including most importantly the Federal Reserve, will not be able to exit from unconventional monetary policy in a benign manner and will ultimately remain committed to ongoing balance-sheet expansion in one form or another,” he wrote then.
