The financial institution said falling real rates continued to provide the catalyst for higher gold prices as global real rates continued to decline with an estimated US$17 trillion in negative yielding debt. The report said recession fears persisted as US yield curves remained inverted while "spot gold prices appear to be pricing in two further rate cuts in 2019 by the [US Federal Reserve] and a continued dovish outlook for 2020".
Added to this is a global macro backdrop with near-term economic risks to the downside in the shape of the US-China trade war and geopolitical tensions in the Gulf of Oman.
The bank increased its near-term average gold price forecast to US$1500/oz for the remainder of 2019 and in 2020 (up from $1350/oz). Looking ahead to 2021 and 2022, its gold price assumption is now $1450/oz (up from $1300/oz) and its long-term gold price has increased to $1400/oz, up from $1300/oz.
RBC also increased its silver price forecast for the second semester to $17.33/oz, compared with $15.75/oz previously, and its longer-term forecast to $17.50/oz ($16.50/oz).
"We expect gold prices to be driven by financial market sentiment, the outlook for the global economy and expected actions by the Fed. We see tactical trading opportunities to buy the gold equities on any weakness ahead of the upcoming FOMC meeting in September and the market's current expectations for a 25 [basis point] rate cut," the report said.
RBC said it believed a new long-term floor price for gold has been established at $1400/oz and that gold equities had lagged the gold price move.
"At the current circa-$1550 spot price, the North American senior gold producers have an average 33% return to our valuations, the intermediate producers a 38% return and the junior producers a 63% return. This suggests to us that there are opportunities for fundamental investors to achieve attractive returns investing in gold equities," it said.