Deutsche Bank - Germany's largest private banking group has just sharply lowered its gold price forecast as investors are increasingly cautious about the prospects of US monetary policy and significant weakening demand for investment in precious metals.
In the latest report, Mr. Michael Hsueh - Analyst at Deutsche Bank - said that this bank currently forecasts gold prices will reach 4,300 USD/ounce in the third quarter, down more than 22% compared to previous forecasts. Gold price forecasts in the fourth quarter were also lowered to 4,800 USD/ounce, 17% lower than the old estimate.
Although the new forecast levels are still higher than the current price level of around 4,110 USD/ounce, Deutsche Bank has become significantly more cautious about the prospects of the precious metal.
This move comes just days after Goldman Sachs cut $500 in its year-end gold price forecast, down to $4,900/ounce, as there are no longer expectations that the US Federal Reserve (Fed) will cut interest rates this year.
Gold prices fell nearly 12% this quarter as conflicts in the Middle East pushed energy prices up, increasing inflationary pressure and causing the market to adjust expectations for monetary policy.
At the most recent meeting, the Fed kept interest rates unchanged but sent out increasingly supportive signals for the possibility of raising interest rates in the near future. At the same time, new Fed Chairman Kevin Warsh pledged to restore price stability and bring inflation back to the target.
Mr. Michael Hsueh said that the market's continuous re-adjustment of expectations for the Fed along with the resilience of the US economy is the main reason for the weakening of gold prices.
The market's revaluation of the Fed's policy outlook, along with still positive US economic data, has played a key role in pulling gold prices down," he said.
According to Deutsche Bank, the forecast that gold prices will reach 4,800 USD/ounce in the fourth quarter is built on the assumption that the Fed will continue to keep interest rates unchanged in the near future.
However, if the Fed implements three to four waves of interest rate hikes, gold prices could fall to around 3,800 USD/ounce.
Another factor that Deutsche Bank is concerned about is the continued withdrawal of capital from gold-backed exchange-traded funds (ETFs).
According to Mr. Hsueh, buying power from ETFs – which have been one of the important drivers supporting gold prices in recent years – is currently "remarkably absent".
In addition, in China, domestic gold prices are trading lower than US Comex gold prices, showing that import demand may hardly become a driving force to support the market in the short term.
However, Deutsche Bank believes that there is still a positive factor helping to limit the decline of gold.
The only pillar that still maintains strength is the demand for gold from central banks and we expect this trend to continue for a long time," Mr. Hsueh said.
After setting a historic peak of nearly $5,600/ounce at the end of January, gold prices have now fallen by about 5% since the beginning of the year, reflecting increasing pressure from prolonged high interest rate prospects and weakening of investment capital flows.
