The gold market will require a large shock for prices to be driven significantly higher – and the metal is more likely to see a continued decline, says Julian Jessop, chief international economist at Capital Economics.
He says the price of gold currently includes a large premium for its status as a refuge from economic and financial uncertainty – and looks expensive compared with other havens.
“Gold prices already reflect a substantial degree of risk aversion, perhaps even more than that built into US government bonds,” he says. “Prices also look high when plotted against the level of the dollar.
“The combination of a strong dollar and even higher gold prices means the metal is extremely expensive in many other major currencies.”
Mr Jessop concludes that a significant fresh shock would be needed to propel prices much higher.
“Admittedly, it is not difficult to think of candidates for just such a shock, including the threat of a eurozone break-up, doubts about the creditworthiness of a major country such as the US or Japan, or the risk of a trade war between China and the west,” he says.
“These lingering risks suggest the downside for gold is limited, but none of them are likely to come to a head over the remainder of this year.
“Accordingly, we continue to expect gold to drop back to $1,000 an ounce by the end of 2010.”
