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'Stronger for longer': Citi sees big gains for gold ahead

Sydney Morning Herald logo Sydney Morning Herald 11/09/2019 David Scutt
a close up of food: A worker carries a 28 kilogram gold bar after casting and cleaning in the foundry at the South Deep gold mine in South Africa. © Bloomberg A worker carries a 28 kilogram gold bar after casting and cleaning in the foundry at the South Deep gold mine in South Africa.

Pressured by rising bond yields and a perceived lessening in geopolitical risks, gold prices have fallen sharply in recent days after they scaled six-year highs last week.

But Citibank’s commodity research team is confident the recent slide isn't the start of a longer-lasting trend, telling clients that prices could soar as high as $US2,000 per ounce within the next couple of years.

“We now expect spot gold prices to trade stronger for longer, possibly breaching $US2,000 per ounce and posting new cyclical highs at some point in the next year or two,” Citi said in a note released this week.

“Lower for longer nominal and real interest rates, escalating global recession risks - exacerbated by US-China trade tensions - heightened geopolitical rifts amid rich equity and credit market valuations, coupled with strong central bank and investor buying activity, are all combining to buttress a bullish gold market environment.”

Citi’s base case scenario – deemed by the bank as a 60 per cent probability – is for the gold price to finish 2019 at $US1,417 per ounce before lifting to $US1,675 by the end of 2020. Longer term, it forecasts that prices will eventually lift to $US1,850 by 2022.

As for the risks to its updated forecasts, Citi deems they’re to the upside with its "bull case" scenario – seen as a 30 per cent probability – looking for the gold price to lift to $US2,000 in 2021 and $US2,150 in 2022.

“We find it reasonable to consider an increasing probability that bullion markets can re-test the 2011-2013 nominal price peaks and trade to $US1,800-$US2,000 per ounce by 2021/22 on the back of a US business cycle turn towards slower growth/recession on top of election uncertainty,” Citi said.

Bart Melek, head of commodity strategy at TD Securities, is also bullish on the outlook for gold prices, telling clients this week that further weakness should be regarded as a buying opportunity.

“In our view, no matter what central banks do over the next several months, the global economy will slide lower due to weaker trade activity in the aftermath of the US-China trade war,” Mr Melek said.

“Germany is showing weakness due to trade, China is continuing to disappoint and there are signs the US is also slowing.

“Given these facts on the ground and the fact that monetary policy is not very productive, the projected declines in gold should be seen as a buying opportunity, as central banks will need to be aggressive in their monetary action to avert a sharp decline in global activity next year.”

Mr Melek believes the gold price is likely to test technical support between $US1,450 to $US1,480 ahead of the US Federal Reserve’s interest rate decision on September 18.

TD Securities is forecasting that gold prices will rebound to $US1,525 in the December quarter before lifting to $US1650 by the end of 2020.

The spot gold price was trading around $US1,490 per ounce on Wednesday, extending the slide from the six-year high of $US1557 per ounce set early last week to over 4 per cent.

Combined with a small rebound in the Aussie dollar, the slide in bullion prices has seen the S&P/ASX All Ordinaries gold index tumble by over 16 per cent from the record peak hit on August 12.

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