As gold typically does well in a weak dollar environment, J.P. Morgan forecasts show gold will likely remain under pressure in the coming quarters, through to the middle of next year.

“Gold’s 12.7% move lower since mid-April and through the first week of October has been largely lock-step with the U.S. dollar’s strength given that the dollar, not gold, was the main recipient of safe haven demand amid escalating trade tensions and risk market weakness,” said Head of Metals Research & Strategy at J.P. Morgan, Natasha Kaneva.

Gold found some support in October, following a surge in U.S. Treasury yields which triggered a sell-off in equities, but this is not expected to buck the trend of rising yields and a stronger dollar in the short-term.

“We view the recent equity sell-off as largely technical in nature, following the same selling template as February, and, similar to earlier this year, believe equities should recover from the move lower. As long as the inverse equities-bonds correlation holds, the gold price will continue to be dictated by the direction of real yields and the U.S. dollar,” Kaneva added.

Precious bulls look to 2019

For most of the year, the difference between short-term and long-dated Treasury yields has been narrowing. If short-term yields move above the long-end of the curve it will end up in what is known as inverted yield curve. As the Fed continues to tighten in 2019, policy will likely move into what the market will see as “restrictive” territory, which could result in an inverted yield curve potentially putting the brakes on further economic expansion.

“We see gold likely repricing lower through the middle of next year, at which point the Fed’s policy will move into restrictive territory. The curve will invert, the expansion will slow and expectations of Fed easing will build. At this juncture, we would expect real rates to move lower and gold’s fortunes to reverse, as gold tends to benefit from consistent drop in real yields during the lead up to recessions and thereafter,” said Kaneva.

In the meantime, the futures market also continues to underprice both J.P. Morgan’s and the Fed’s interest rate rise forecasts, leaving plenty of room for another round or two of repricing. This view prompted the J.P. Morgan Research team to recently cut its gold price forecast for this year and next, while maintaining a bullish outlook for the precious metal in the latter half of next year.

“We still keep a bullish bias in place for the second half of 2019, as we believe the development of an inverted yield curve in the U.S. will likely attract increased interest in gold among investors,” Kaneva said.