Gold Analyst Says Rally Is Short-Term, Prices Will Recede To $1,600 By Year's End

Gold has rallied over the past month, but it's a short-term rally, according to one analyst.

If the global economy finds its feet over the second half of 2020, safe haven purchases of gold are likely to ease substantially, with the commodity's price falling back to $1,600 by the end of 2020.

On Wednesday, the shares of several gold and silver companies were trading higher as equities gained amid a potential stabilization in oil prices.

Capital Economics analyst Oliver Allen said that while gold has rallied over the past month, he doesn’t think that it will continue to outperform most other asset classes.

The GSCI Precious Metals Index, in which the weight of gold is 90%, will be the worst-performing headline index among those tracked by the Capital Economics asset allocation service, he said. 

The index has returned almost 15% over the past month, Allen said. 

"Of the headline indices that we cover on our Asset Allocation Service, only a handful have fared better over the same period. This has mainly reflected a surge in the price of gold, from just under $1,500/oz. to roughly $1,700."

What Triggered The Recent Gold Rally?

Gold’s rally has resulted primarily from two developments, the analyst said. 

"The first is an unwinding of the fire sales that took a toll on safe, as well as risky, assets during the first half of March, as the turmoil in markets that followed the spread of the coronavirus around the world reached its peaked. The subsequent fall back in the bid-ask spread for gold suggests that this pressure has now eased considerably."

The second trigger is massive policy support from the Fed, which pushed down nominal Treasury yields and led to a recovery in investors’ expectations for inflation, Allen said. 

“As a result, the real yields of those bonds fell by even more than nominal yields and so reduced the opportunity cost of owning gold, which is a 'real' asset that pays no income. Real yields tend to have a close relationship with the price of gold.” 

Allen predicts that the price of gold will fall back to $1,600 by the end of 2020. 

Price Action

Gold prices were at $1,711.28 at the time of publication Wednesday.

The SPDR Gold Trust GLD was trading up 1.61 % at $161.16 at the time of publication Wednesday and the VanEck Vectors Gold Miners ETF GDX was trading up 4.91% at $32.06. 

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