Capital Economics turns bullish on gold over US-China trade war fears

Capital Economics expects gold prices to stay high for several more years as investors look for safe havens from financial shocks.

Analyst Julian Jessop said the growing fears over a Chinese/US trade war and the future of the European Monetary Union had prompted his firm move from their previously sceptical stance on the precious metal.

He said: 'We now expect gold prices to stay high for several more years. Fears of runaway inflation or a dollar collapse remain exaggerated. Nonetheless, prices should continue to be supported by strong demand for a safe haven from other potential economic and financial shocks, such as a US-China trade war and the break-up of EMU.'  

Capital Economics has raised its end-2010 forecast to $1,200, which represents a temporary correction from current levels of around $1,280 as the dollar continues its recovery for the rest of the year.

However, following this temporary correction it expects a renewed rally to at least $1,400 in 2011 as the global economy is hit by a new wave of shocks.  

Capital Economics' previous bearishness on gold had been based in part on its long-held view that inflation will remain subdued and that deflation is by far the greater risk.

However, with the US and UK primed to pump billions more into their economies to try and reflate themselves out of the crisis, Jessop has changed his tack.

'Inflation expectations have indeed stayed relatively low. Nonetheless, the widespread assumption that ultra-loose monetary policy and quantitative easing (QE) in particular must inevitably debase the value of paper currencies has still boosted the price of gold,' Jessop explained.

'This is not necessarily right: the creation of large amounts of central bank money has not been matched in the broader monetary aggregates, and the stimulus could be withdrawn quickly if inflation threatened to take off.

'But, with official interest rates more likely to remain near zero in the major economies for the foreseeable future (minimising the opportunity cost of holding gold) and additional QE more likely than an early exit, it is hard to see anything on the horizon to change the positive sentiment towards gold.'