After a spectacular 2020, gold started 2021 down until it was rebuilt in the second quarter of the year. The good data from April and June in terms of demand pushed the precious metal from around 1,715 dollars a bullion to once again exceed 1,800 in June and to recover them again in July after losing them momentarily. However, although the situation does not seem entirely unfavorable, it seems that a difficult period awaits the metal .
As Christopher Swann of UBS notes in a note, the demand for gold increased substantially in the second quarter of the year, with suppressed demand among consumers that boosted jewelry sales by 60% year-on-year.
Also, sales of gold bars and coins for investment purposes increased 56%. The central banks were also net buyers of gold in the second quarter and there were net inflows in the ETF gold. In short, demand in the first half of the year overall was at the highest level since 2013.
On the other hand, Swann argues, the recent drop in real 10-year US Treasury yields to a record low of -1.12% should also have spurred gold, lowering the opportunity cost of holding the metal.
However, despite this series of favorable factors, the metal has only enjoyed a “modest rebound”, in the words of the analyst, with a rise of around 2.5% since the end of June.
“It is less than you would expect given strong demand for jewelry and the record low in real yields … and reflects concerns that the recent positives for gold will soon fade ,” admits Swann, highlighting the fact that the metal is trading just above $ 1,800 an ounce, below its 2021 high of $ 1,949 in January.
When looking for an explanation for this scenario, Swann found three reasons . The first is that “the recent decline in real yields appears to be driven by technical rather than fundamental factors, so it cannot be expected to last.”
“The weakness of the Treasury issuance has been driven in part by an unusually large surplus in the General Treasury Account, which the US government uses to carry out most of its day-to-day operations,” continues the bank man. Swiss.
“The recent decline in US bond yields does not reflect the poor prospects for a US recovery, which is bolstered by a relatively low VIX index of US equity implied volatility, which is close to its average of 19 since the 1990s, “Swann initialed.
The second reason is that “investors are still bracing for the strength of the US dollar , which is traditionally a headwind for gold. This is reflected in net long positions in dollars,” he says.
Third, Swann notes, “the Federal Reserve is still expected to taper in early 2022. ” “Despite recent dovish comments from Fed Chairman Jerome Powell , policy makers continue to prepare the market for an eventual withdrawal from bond purchases,” he added.
“Therefore, we believe that gold prices are not prepared to go up. We maintain our view that gold prices should fall to $ 1,700 an ounce by the end of the year and then fall further in 2022 when the decline begins. As a result, we do not see gold offering the best protection against downside risks for investors, “Swann concludes.