At current prices, gold is attractive to long-term buyers looking to hedge their portfolio against risks from dollar weakness, negative interest rates, high inflation and exogenous risk events. Economists at DBS Bank see the following four scenarios as probable, and the overall pattern is for gold price to rise in most scenarios.
See – Gold Price Forecast: XAU/USD to edge higher towards $1900 – ANZ
Gold to perform in most macro scenarios
“One scenario would be when the market renews its focus on US inflation risks, amid an improving labour market and supply-side disruption. This could set the stage for a ‘risk-off’ event. This scenario played out in 2003 when gold reacted strongly to inflation fears on the back of strong oil price.”
“Another scenario could be escalating virus cases as vaccine efficacy fades. This could lead to a downgrade in growth for 2022 and a delay in the quantitative easing (QE) taper timeline, which will then be a positive for gold. The US stock climb would probably come to a halt, and gold will serve its role as a hedge for volatility.”
“The inverse correlation with the USD Index (DXY) has intensified in 3Q21. Nevertheless, with negative correlation at a high, a reversal in the dollar’s strength could see a strong reversal rally in gold. Our DEER FX model indicates that the dollar is overvalued on a long-term basis. However, the dollar could stay firm into 1Q22, depending on the US’s QE taper timeline.”
“In a goldilocks scenario with moderate growth and mild inflation, there will be no rush for the Fed to hike interest rates, and bond yields will likely stay at low levels. We believe gold will still be supported in this environment as central banks around the world continue to accumulate gold as a risk diversifier.”