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Citi

A Likely Slower Grind Higher for Gold

  • The current gold bull market started in December 2018 and hit its growth spurt a year ago, in May 2019. Spot and futures prices have rallied 30-35% since that time, to the ~US$1,700/oz range, as the COVID-19 shock brought forward constructive gold market themes that were already brewing due to US-China trade tensions and global manufacturing slowdown. These bullish tailwinds for gold include: the accelerated Fed policy path to zero lower bound (ZLB) and fresh assets purchases; the global growth recession, underpinning a risk-off and highly uncertain macro outlook; net gold buying from EM central banks; and extreme asset market volatility amid robust investor inflows into gold derivatives and ETFs.

 

  • However as the gold bull market ages during a deep global recession, gold may be prone to sell-offs to the US$1,500-$1,550/oz area in coming quarters, before marching higher again. Unwinds of long gold trades could be prompted by another equity market sell-off given unusually strong gold-equities returns correlations and record gold ETF holdings.

 

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  • “Lower for Longer” interest rates are supportive of Citi analysts’ positive view on gold. However, there is concern over the large divergence between record strong investor demand for gold and a record weak retail bid for gold (e.g. jewelry). Combined with reduced net buying from the official sector and a potential increase in gold recycling for the rest of 2020, Citi analysts think prices may make a slow grind higher but generally hold between US$1,600-$1,700/oz, rather than quickly spike to the US$1,850-$1,950/oz area. In turn, a global growth and EM recovery in 2021 could be what supports the next leg higher towards US$2,000/oz.

 

  • Overall, Citi analysts remain medium-term bullish. Forecasts for Q2 average gold prices are upgraded to US$1,710/oz and 2020’s average lifted from US$1,640/oz to US$1,680oz, while maintaining 2021’s average at US$1,925/oz.

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