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Key Takeaways
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Gold prices have fallen significantly this year, with spot gold down 5% year-to-date and 27% from its January high.
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Central banks are expected to increase gold reserves, potentially supporting prices in the second half of the year.
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Analysts have lowered gold price forecasts due to hawkish statements from the Federal Reserve, but some still see potential for upside.
Where has the bullion bull gone, and will it return? Investors are likely wondering.
Gold was already limping along when the Federal Reserve’s new chair, Kevin Warsh, handed the market a hawkish message earlier this month, driving Wall Street to pencil in the possibility of higher interest rates and sending precious metals to fresh lows. The Fed’s redoubled commitment to taming inflation took some shine off gold because yield-bearing assets such as Treasury notes tend to be relatively more attractive in high interest-rate environments.
Spot gold prices, recently at around $4,100 per troy ounce, have fallen about 5% since the beginning of the year and are down 27% from their January record high of $5,600. Silver, whose rally was even more powerful than gold’s last year, is down roughly 50% from its all-time high of around $122, and off 17% year-to-date. Those losses are a stark contrast to the performance of the precious metals last year, when gold and silver gained about 65% and 150%, respectively, and were among the top performing financial assets.
Lately, commodities analysts and portfolio strategists have turned more negative on gold’s near-term prospects, citing changing expectations around monetary policy, but they also seem to be holding on to some optimism that precious metals could stage a comeback in the second half given how far they’ve fallen.
What’s the bottom line for investors?
While Wall Street firms have turned more negative on gold’s prospects, their base case outlooks for the next six months still imply upside of 20% of more, rivaling U.S. stocks’ gains last year.
The main argument for upside in gold prices, which underlies many Wall Street firms’ outlook for the metal, is that central bank reserves are increasingly tilting toward gold, and away from the U.S. Dollar and Treasurys. Investors have bought under the same premise—a strategy that shifts capital away from currencies and into hard assets, called the debasement trade.
State Street Investment Management’s gold strategists led by Aakash Doshi said that trends driving the “bullion bull cycle”, including demand for hedging currency debasement, should remain intact in the second half.