Strength in the US dollar and stability from the European bailout will take the steam out of gold's recent run and send prices to below $1,000 by year's end, one economics firm says.
Gold broke its record dollar-highs this week but should even be higher considering all of the global economic uncertainty and market turbulence, said Julian Jessop, chief international economist at London-based Capital Economics.
"Gold's recent performance has been impressive and stronger than we had anticipated, but it should perhaps have even been a little better," Jessop wrote in a note to clients. "Widespread fears over public debt, the integrity of policy-making and the health of the financial system should be ideal for an asset whose value is not dependent on the creditworthiness of any government or bank."
But the metal's price ratio against oil is actually below the historical average of 17, argues Jessop, who believes the trend shows resistance to gold moving higher.
"The EU rescue package has averted an imminent financial meltdown in the euro-zone, while at the same time the required fiscal tightening will keep inflation subdued," Jessop said. "With global growth and commodity prices also set to fall as the policy stimulus fades in other key economies, including China, gold should lose the support it has gained as an inflation hedge."
Jessop concedes that a short-term move to $1,400 an ounce is possible but will not last. And he offers a contrarian view, at least in the near term, relative to gold's trends.
Meanwhile, gold prices steadied Thursday around $1,235 an ounce, but analysts expect it to extend gains in the coming days as investors look for safety amid global currency weakness and general economic uncertainty.
"I think we could easily see a new record high before the weekend," analyst Walter De Wet at Standard Bank told Reuters, referring to the spot gold price. "But also ...at these levels smaller than usual volumes could push prices higher," he added.
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