(Kitco News) - An improving U.S. economy and growing expectations for an early rate hike will drag gold prices lower by the end of the year, but the impact will be limited says commodity economists at a leading macro-economic research firm.
Caroline Bain, senior commodity economist at Capital Economics said, in an interview with Kitco News, that they are currently in the process of revising their year-end price target for the yellow metal lower; the firm’s current price target is $1,400 an ounce.
Bain wasn’t able to provide the firm’s new price target because their research is still ongoing. She said that they are expecting to release their revised forecast sometime next week. Although the economists are slightly more negative than their previous forecast, Bain added that they are not expecting to see prices collapse by the end of the year.
“There are a variety of factors supporting gold but the outlook is still bearish,” she said. “However, I am expecting that we will make a small revision to our price outlook.”
The biggest reason for the downward revision is because of the recent improvement in the U.S. economy,
Bain said, which they expect will force the Federal Reserve to hike interest rates sooner than expected.
Most analysts are forecasting the U.S. central bank to raise rates in mid-2015, but economists from Capital Economics anticipate that rate hikes could come as early as March. Capital Economics re-affirmed that outlook Wednesday after the central bank released the minutes from the July Federal Open Market Committee meeting.
However, Bain added an improving economy, and rising interest rates, are already priced into the market and these factors will have a less negative impact on gold moving forward. Instead the focus is now shifting to inflation expectations, a major driver of gold prices.
“We should start to see higher inflation as the economy improves and we don’t know how high it will be,” she said. “There is still some uncertainty over inflation because of the unprecedented steps the Fed has taken. We are in unchartered territory.”
Bain also said that gold could find some support later in the year as a result of portfolio reallocations. Rising interest rates could halt the free-flow of capital into the record-breaking equity markets and force investors to take a more defensive position, she explained.
Also supportive for the gold market is an expected decline in supply, both from mining and recycling.
“We are already seeing junior mining companies struggle because of the low price and that will limit new supply,” she said.
On the recycling front, Bain said they are seeing more people hold on to their scrap gold jewelry, waiting for prices to return to pre-2013 levels.
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By Neils Christensen of Kitco News; nchristensen@kitco.com
