What is the Price Outlook for Gold?
“While gold prices are off from the highs reached in the first days of the Russian invasion of Ukraine in early March, they are expected to remain at elevated levels. There is a war premium on gold, along with the continuing premium imbedded in the gold price for inflation concerns.
Prices have been consolidating between $1,890 and $1,950 since the middle of March. There is a lot of uncertainty in the markets tied to inflation, the ability of central banks to curb inflation, concerns about if central banks create a recession while attempting to rein in inflation. All of these concerns are further complicated by the war between Russia and Ukraine and its impact on commodity prices and supply chains.
In such an environment, gold prices are expected to remain at elevated levels with an upward bias in the next few months. Gold prices have the potential to break out to the upside of the recent $1,890-$1,950 range. Prices have some initial resistance around $1,960 which if broken could see prices rise back toward $1,980 or even $2,000 or $2,100. Given the uncertainties of war, prices can spike much higher. It may well be that as the war progresses the war premium on gold dissipates some. However, one or more major turns toward a worsening of the war in Ukraine could quickly reverse any such gold price softness.
Interest rates have begun rising, which is expected to act as a minor headwind to gold prices. Historically, however, it has been observed that real rates need to rise above the 3% level before gold prices begin to fall meaningfully because of rising interest rates. It is extremely unlikely for the Fed to raise rates that strongly. At present expectations are that rates might rise as high as 3% on a nominal basis by the end of 2022. With inflation perhaps subsiding to 5%, that would still leave real inflation-adjusted interest rates around a negative 2% or higher. And in the absence of such an increase in rates, the numerous other political and economic concerns
should keep prices elevated.
Thus, gold prices seem likely to remain elevated in the second quarter. In the second half of this year prices might subside to a $1,780 - $1,880 range, however. By the third quarter there may be a ceasefire or more solid move toward ending the Russian invasion of Ukraine. This could dissipate the war premium in gold prices. Interest rates will be rising, perhaps to around 1.5% or higher. Overall economic conditions are expected to show stronger trends. Equity markets seem more likely to be setting new highs than falling in such an environment, while percentage increases in inflation (if not actual price levels) may be subsiding, removing the inflation premium presently on gold. These factors could reduce gold into a somewhat lower rate.
It must be emphasized that the risks will not completely disappear, and gold prices are likely to remain at historically record high levels on a quarterly basis.
Offsetting the potential effects of these trends and conditions to reduce gold prices from the high levels of March will be issues related to the U.S. mid-term elections, potential other divisive political developments in the United States, a resumption of intra-European ‘issues,’ and political issues elsewhere. None of these seem likely to push economic conditions into recessionary territory, at least in the second half of 2022 and 2023, but they could help keep gold prices elevated.
A variety of factors work individually and collectively in influencing the level of investment demand for gold. These factors include but are not limited to those listed above. The extent to which these various factors are positive or turn positive as criteria for buying gold in the minds of investors, and the intensity of those investor convictions, determines the direction, trends, and levels for the price of gold.”