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The gold market has broken out after five months of consolidation, and commodity analysts at Société Générale see the potential for a significant rally through the first quarter of 2022.
In its latest price forecast, the French Bank said that U.S. monetary policy will continue to support prices as inflation pressures rise.
“The Fed seems to be reluctant to increase interest rates any time soon, this combined with high inflation create the perfect mix of negative real rates for gold,” the analysts said.
In its updated forecast, Soc Gen sees gold prices averaging around $1,950 an ounce during the first quarter of next year. The bank’s average price target represents a 4.5% gain from current prices. December gold futures last traded at $1,866.90 an ounce, relatively unchanged on the day.
Last week, gold prices saw their best price gains since May, pushing above $1,850 an ounce as U.S. Consumer Price Index saw an annual rise of 6.2%, its most significant increase in more than three decades.
While Soc Gen expects inflation to fall from current levels, the economics expect price pressures to remain above trend through 2022. The bank sees inflation rising 4.4% this year and 3.7% next year.
Although the bank is bullish on gold for the start of the year, the analysts said that prices should start to cool in the second half.
“Inflation is expected to retreat in the second half of next year while interest rates slowly increase. The U.S. real rates should turn positive again by the end of 2022 and see gold goldilocks moment passing,” they said.
The analysts said that on the upside, if inflation persists and economic activity starts to slow, gold prices could push above $2,000 an ounce by the second quarter and remain elevated through 2022.
The analysts reiterated that investment demand for gold-backed exchange-traded funds (ETFs) remains the critical component to unlocking the precious metal’s value.
“Our conviction is mainly pinned to our expectation that the ETF outflows will cease, and we will begin to see some moderate inflows by the end of the year and into the next one,” the analysts said. “For 2022, we expect a total 300t inflow into gold ETF, mostly focused on the first half of the year and inflation risk will still be in the spotlight. This will be enough to significantly drive gold price but also much lower compared to the 408t and 874t experienced in 2019 and 2020 respectively.”
Soc Gen added that they also see the potential for central bank gold demand to support gold prices.
“In a world becoming more multipolar and with the U.S. debt ballooning, the U.S. dollar as a reserve currency is losing credibility and central banks are keen to diversify away from it, building up gold reserves,” the analysts said.
By Neils Christensen
For Kitco News
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