(MENAFN- Khaleej Times) Gold's failure to breach the $1,850 an ounce level so far in 2021 and another retreat below $1,800 could open the floodgates to more selling, analysts warned on Wednesday.
In global markets, gold prices fell near two-week lows on Wednesday amid a stronger dollar and hardening of US bond yields. Spot gold was down 0.2 per cent to $1,791.36 per ounce.
However, analysts at Bank of America do not rule out a potential for gold prices to push above $2,000 an ounce in 2021. Maintaining their forecast for prices to average the year around $2,063 an ounce, they said that gold's peak is likely to come in the second quarter with prices averaging the three-month period around $2,100 an ounce.
BoA's forecast echoes the outlook given by London Bullion Market Association analysts, who saw gold prices averaging $1974 per ounce across 2021, a rise of 11.5 per cent from 2020's record-high annual average as mass vaccinations worldwide spur a strong economic recovery from the Covid pandemic.
"Gold has underperformed in 2021 so far," said Walsh Trading co-director Sean Lusk. "The market has had a real hard time above $1,850-60. It is surprising in some way if you look at the performance of crypto."
If gold is unable to hold the $1,800 level next week, there is a risk of investors liquidating their long positions, which could push prices into $1,705-10 territory — about 10 per cent down on the year, Lusk said.
'Longer-term, these price dips will be bought, but who is to say that the market might not go for another 5.0 per cent down from here," Lusk said. "The $1,705-10 level could be the next target down. Nothing would surprise me here. The ETF market has been seeing outflows already."
There also seems to be a pause in the physical gold market with high premiums weighing on demand, said Peter Hug, an analyst.
"Retail investors are becoming less enthusiastic about chasing premiums in both gold and silver. Premiums are high, and the amount of inventory that is available on a cash basis is anemic. There has been a hiatus in the physical buying market over the last few days," Hug said.
The big unknown right now is with the US product after the US Mint stopped producing its American Buffalo coins. The Mint is also about to stop producing its one-ounce gold American Eagle coins with the old design, said Hug.
Analysts at BoA said that the biggest hurdle for gold remains inflation pressures, noting that the global macro backdrop is quickly changing, discouraging investor inflows into gold.
The gold market is facing some difficult challenges as the Covid-19 pandemic continues to weigh on physical jewellery demand in critical markets. The analysts also noted that central bank demand for gold has slowed, and the latest pillar of strength to weaken is waning investor interest.
"With the Fed likely on hold near-term, break evens are set to rise further, a positive for gold. Yet, the last upward trend in nominal rates was not bullish for gold, even as consumer inflation accelerated. So apprehension over a normalisation of monetary policy could resurface in 2H21," they added. "Many of the underlying issues, including excess liquidity in the system and debt sustainability, have not gone away. Hence, we believe gold prices will ultimately stabilise despite the ongoing challenges."
On gold jewelry demand, Bank of America said that while sales in India and China are slowly starting to improve, there is a long way to go before they reach pre-pandemic levels.
"Going forward, we expect the rebound to continue, partially because the country's economy recovers from the pandemic and authorities foster retail consumption, but also because the jewelry industry is now in a much healthier condition after a period of consolidation," analysts said.
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