Amid a bullish sentiment, Capital Economics "pours cold water": Gold prices have peaked

Despite gold hitting another all-time high, not everyone believes that this upward trend will continue.

In a report released last week, Hamad Hussain, the macro commodities economist at Capital Economics, stated that he expects the recent peak in gold prices to be the peak in the second half of 2024.

Looking ahead, he forecasts that by the end of this year, gold prices will fall to $2,200 as higher prices dampen demand in key global markets.

Hussain pointed out that the main focus remains on demand from China, explaining that consumers may struggle to maintain the strong buying pace seen in the first half of this year due to the price increase.

While gold has retraced from its record highs, it is still up about 19% since the beginning of the year. He said in the report:

"Indeed, strong demand for gold in China seems to have been one of the factors driving gold prices higher this year and is unlikely to disappear. However, we expect that historically high gold prices will begin to have a negative impact on Chinese consumers, who are typically sensitive to prices. It is worth noting that after 18 consecutive months of increasing gold holdings, the People's Bank of China appears to have paused gold purchases in May."

The explosive rise in gold began last week when the market started pricing in an aggressive rate cut by the Federal Reserve in September. However, Hussain suggests that this could ultimately turn into a "buy the rumor, sell the fact" scenario.

He said, "While a rate cut is expected to boost gold prices under otherwise identical conditions, the key is that much of the Fed's expected easing is already priced into the market. We expect that by the end of 2024, the yield on the 10-year US Treasury will only fall to 4%, below the current level of around 4.2% and below the nearly 5% in October 2023. Overall, we expect the reduced demand for gold in China to offset the upward impact of loose US monetary policy, and we believe gold prices will decline."

Meanwhile, the company's Chief Climate and Commodities Economist, David Oxley, stated in another report released on Tuesday that in a high-price environment, jewelry demand (a key support for the global gold market) will weaken.

Oxley said, "Income growth in key markets will offset some of the decline in demand, but jewelry demand is likely to remain at levels seen in the late 1980s at most. As gold prices remain elevated, consumers are increasingly able to invest in gold through other channels, and jewelry demand for gold is likely to remain mostly flat in the coming years."