Rising real interest rates and a stronger U.S. dollar, which have been significant headwinds for gold prices this year, will persist into 2019 and eventually drag the metal below $1,200 an ounce, according to one French Bank.
In an email comment to Kitco News, Harry Tchilinguirian, global head of commodity markets strategy at BNP Paribas, reiterated his banks’ bearish forecast for gold and silver in the new year. The bank expects to see gold prices averaging next year at $1,145 an ounce and silver prices averaging $14.20 an ounce.
The bank’s average gold price represents a decline of more than 8% from the current levels. February gold futures last traded at $1,246.60 an ounce. Meanwhile the bank’s silver forecast represents a decline of around 4%, as March silver futures were trading at $14.83 an ounce at the time of writing.
Tchilinguirian said that they prefer U.S. Treasuries over gold as the preferred safe-haven asset. He added that with inflation expected to be muted through 2019, gold or silver do not look like attractive assets.
“We continue to hold a negative bias on gold despite the recent firming of the prices, notably for the beginning of 2019,” he said. “With inflation expectations, expressed by the 5year/5year forward breakeven rate, falling rapidly since mid-October, we think real rates will move higher which is negative for [precious metals] in terms of the opportunity cost of holding the non-yielding asset.”
Although weaker equity markets have improved gold’s safe-haven allure, recently pushing prices to a five-month high, the bank sees the recent move as temporary.
“We see the recent jump in gold’s price as limited in scope, and owing mostly to the recent de-risking in equity markets that we view as a correction rather than being in the throes of a bear market,” the bank said in its report.
Although some de-risking in equities has thrown gold a short-term lifeline, the bank still does not view gold as a defensive asset.
“Since the summer, there has been no shortage of developments that could drive safe haven demand for gold,” the bank’s analysts said. “In each case, gold has failed to convincingly react and rally higher.”
Tchilinguirian added that lackluster investment demand for gold is reflected in disappointing holdings of gold-backed exchange-traded funds and other products. The latest data from the world’s biggest gold ETF SPDR Gold Shares shows that its holding for the year have declined by 73.94 tonnes.
“As you can see in the amount of gold held by physically backed ETFs (which have been fairly stagnant in the past two months) investors appear reluctant to increase their long exposure to the yellow metal,” he said.