(Kitco News) – The gold market continues to struggle after last week’s big selloff, and one firm has warned investors that there’s still more downside potential for the precious metal.
In a report published on Monday, Kieran Tompkins, commodities economist at Capital Economics, said he sees gold prices ending the year 4% lower than current prices with a year-end target of $1,650 an ounce.
Rising real yields point to lower gold prices in the second half of the year, Tompkins said, adding that gold prices have fallen 15% from their March highs. The comments come as gold prices continue to test long-term support around $1,730 an ounce.
“While the price of gold has fallen sharply over the past two months, including another small drop today, it still looks much higher than its typically strong inverse relationship with long-dated US TIPS yields would suggest. We suspect the price of gold will fall further from here as the usual relationship with TIPS yields partially confirms,” Tompkins said in the report.
The gold market started the year on a strong note as investors sought to hedge against an unprecedented rise in inflation. However, Tompkins noted that inflation fears have receded recently and been replaced by recession concerns.
“We pointed out a few months ago that one of the pillars behind gold’s previous resilience may have been concerns about high inflation. However, these concerns have eased in recent months, with a large drop in forward 5y/5y inflation expectations roughly mirroring the fall in the gold price,” he said.
As of Friday, the 5-year/5-year inflation index was trading at 2.62%, its lowest level since the start of the year. Some analysts have said that breakeves need to stabilize to give the gold market a chance to bottom out.
Along with rising real yields, Capital Economics expects the strong US dollar to remain a headwind for gold. The British research firm said the dollar should hit parity with the euro and eventually surpass it.
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