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(Kitco News) – Safe haven demand could send gold prices back to $2,000 an ounce in the near term; however, the precious metal faces tough challenges throughout the year, according to Capital Economics.
In a report on Tuesday, the British research firm said Russia’s invasion of Ukraine could support gold prices in the near term. Still, the company sees gold dropping to $1,600 an ounce by the end of the year.
“Gold was the group’s pick among safe havens, perhaps because currencies and US Treasuries were hit harder by investors’ sharp reassessment of the expected speed of the US tightening cycle. For this reason, gold may continue to be investors’ safe haven of choice,” said Kieran Tompkins, deputy economist at Capital Economics and author of the company’s latest gold outlook.
Kieran reiterated the firm’s position that when the crisis in Eastern Europe is resolved, rising interest rates will again be a major headwind for gold. However, Kieran also noted that it is too early to determine the impact of Ukraine’s invasion on global markets and supply chains.
“If sanctions and shortages significantly disrupt activity, central banks could take a softer approach to tackling inflation than is expected in markets. Indeed, some of the sharp rise in real yields in January reversed recently.Alternatively, it is also doable in the current environment of high inflation that central banks become more hawkish due to lingering concerns about second-round effects, particularly in the US, which are more isolated from the fallout than Europe,” he said.
Kieran also noted that investors should pay attention to central bank flows in the gold market. On Monday, the Russian central bank announced that it would start buying gold on the open market; however, Kieran said Russia is just as likely to start selling its gold.
“Western sanctions against the CBR have isolated a large part of its gold reserves held in other central banks which are now beyond the reach of the CBR. However, according to its annual report, the entirety of its gold reserves, assessed at over $130 billion, are As such, the central bank could use this stock as leverage to raise currency to provide liquidity to financial markets,” he said in the report.
“Looking at this cocktail of factors, we suspect the price will rise to over $2,000 an ounce in the coming months due to safe-haven demand. But potential CBR selling and the impact on trading cycles Central bank tightening makes the picture murkier,” he added. “We think they should determine how much of a drop we expect. For now, our forecast is that the price will end the year at $1,600 per coin.”
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