Precious metal prices came under pressure in September, with the US dollar reaching a one-year high and rising bond yields triggering a sell-off in gold.
Gold has confounded the market in recent months, as rising inflation would typically be supportive for investors increasing their exposure to the metal.
But expectations among central bank leaders that inflation is temporary, and that economic recovery from the Covid-19 pandemic will allow them to begin tightening monetary policy heading into 2022, are among the key drivers for why the gold price is falling.
But what does that mean for the future direction of the market? Will gold prices go up again in the future?
In this article, we look at the metal’s recent performance and the outlook for the coming months.
Gold drops as dollar climbs to one-year high
Gold fell to $1,722.90 per ounce on 29 September, its lowest level since March, moving down by 9% from $1,895.10 per ounce at the end of 2020. The gold price fall was accelerated by strength in the US dollar prompting investors to seek higher returns from their money by holding the dollar rather than the metal.
The same day, the US Dollar Index (DXY), which measures the dollar against a basket of currencies, climbed above 94 for the first time since October 2020. The market reacted to recent indications from the US Federal Reserve that it could begin to taper its monthly purchases of $120bn in debt and raise interest rates earlier than expected in 2022.
The dollar has also found support as the official Chinese manufacturing Purchasing Manufacturers’ Index (PMI) for September fell below 50 – from 50.1 in August to 49.6 – putting it into contraction for the first time since the start of the pandemic. Factory activity has been affected by restrictions on electricity supplies and pollution-reduction measures, as well as concerns about the impact of the debt crisis at Chinese property giant Evergrande on the broader economy.
The silver price fell harder still because of the wider industrial uses of the metal. That pushed up the gold-silver ratio – the number of ounces of silver needed to buy one ounce of gold – above 80 for the first time in a year. That indicates investors are using silver to take a position on the Chinese economy and manufacturing activity.
The gold price has been in a downward trend since early September, when the S&P 500 Index (US500) in the US hit a fresh all-time high. On 3 September gold was trading at a two-month high above $1,833 per ounce, after rising from a dip to $1,726.50 on 9 August.
In early June, gold had climbed above the $1,900 mark for the first time since January, raising expectations that the price could return to the psychologically important $2,000 per ounce level. But, having dropped through key support levels, gold has been unable to establish a fresh rally.
What is the outlook for gold following the dip? What do projections from analysts show?
Gold price forecast: what are the levels to watch?
Technical analysis by Nicky Shiels, group head of metals strategy at MKS PAMP, shows that at $1,730 per ounce, gold is at the same level as “when Bitcoin hit its $60K peak and all the furore was about cryptos, less so precious. The ever-important $1,675 handle (triple bottom but also near where the bulk of ETF holders are long at) is nearby. Beyond that, $1,560 is where gold has technically erased all ‘Covid premium’ (a stretch we believe)”.
Gold would need to reclaim an old floor at $1,750 before the 50-day moving average is in view at $1,786, which would put current central bank purchases back at the money, as they’re currently long above $1,800.
Shiels wrote in a recent report: “With the Fed's taper programme providing stronger shorter-term headwinds (over longer-term bullish tailwinds like the US’ fiscal path, an out-of-left-field catalyst is required for gold to reclaim the Biden top ($1,910).”
MKS PAMP’s base case gold forecast puts the price at an average of $1,850 per ounce in 2022, up from $1,800 in 2021, with a bullish scenario of $2,200 per ounce and a bearish scenario in which the price falls to $1,400 per ounce.
Analysts at Zaner are also focused on technical levels indicating the potential for a further price decrease. They wrote on 30 September: “We see the prevailing trend in gold and silver remaining down as the chatter about tapering continues to flood the headlines daily, and more importantly there are signs the Chinese economy is slowing from delta, energy shortages and/or increased Chinese government regulation.”
Analysts at TD said in a recent analysis: “As global markets increasingly price the Fed's exit, the resulting breakout in Treasury yields has catalysed aggressive CTA flow across global rates. While 'talking about talking' about tapering removed the sting from the signalling channel of quantitative easing, the recent rise in rates also likely reflects the stock effect, which is in turn weighing on precious metals.
“In fact, weakening momentum signals are likely to catalyse a CTA selling programme which could further weigh on the yellow metal. Yet, price action has remained largely contained relative to that of Treasuries and real yields, reflecting a cleaner discretionary and trend-following positioning slate in gold which should keep any weakness from morphing into a rout.”
In the meantime, in a recent research note, analysts at ANZ noted:
They added: “The USD is expected to remain weak, as other central banks will be ahead of the Fed in their tapering and rate hikes. Physical demand is robust, supported by strong buying from central banks. Consumer demand is also improving in China and India.”
ANZ’s gold price expectation is for the metal to return to the $1,900 per ounce level by the end of the year, then decline to $1,550 per ounce by the end of 2022.
When considering analyst commentary, it’s important to keep in mind that they can get their estimates wrong. You should always do your own research to form a view of the outlook for an asset and the relevant market conditions.
How and where to trade gold in 2021
CFDs give you the opportunity to try to profit from both positive and negative price fluctuations. If you expect the metal’s price to rise, you can open a long position. If you think it will fall, you can short the stock.
Another advantage of CFD trading is that you can use leverage to open significantly larger positions with a smaller amount of initial capital. However, you should be aware that using leverage will also magnify the size of your losses if the share price moves against your position.
Make sure you understand how CFDs work before you start – you can learn more about CFDs with our comprehensive guide.
Do your own research and always remember your decision to trade depends on your attitude to risk, your expertise in this market, the spread of your investment portfolio and how comfortable you feel about losing money. Never invest more than you can afford to lose.
Create an account on Capital.com, and stay on top of the latest gold news news, price analysis and forecasts to spot the best trading opportunities.
Edited by Valerie Medleva
Some investors opt to keep some exposure to gold in their portfolio for diversification as a hedge against a fall in stocks and bonds. However, whether gold is a good investment for you at this time depends on your outlook for the market and whether you expect it to rebound or fall further.
Gold is driven by macroeconomic factors such as interest rates, inflation, industrial production and the value of the US dollar, as well as stockmarket sentiment. Investors tend to view gold as a safe haven, buying it during times of economic and political uncertainty and selling when there is more confidence in riskier assets.