MOSCOW/SINGAPORE – Citigroup’s prediction that gold could rally above $2 000/oz in two years would be negative for another precious and shiny commodity: diamonds, according to Barry Ehrlich, an analyst at the bank.

Citi’s bullish scenario for gold is based on drivers including the prospect of the Federal Reserve cutting interest rates to zero, rising risks of a global recession and heightened geopolitical tensions.

Compared to gold, diamonds are an inferior store of wealth and therefore unlikely to benefit significantly from an investor flight from fiat currencies, Ehrlich wrote. A weaker global and US economy would hurt demand.

“A healthy diamond market requires a healthy US (and China, India) middle-class consumer,” he said.

Finally, history shows that elevated gold prices result in higher levels of recycling.

During the 2011/12 rally, when gold touched its current record of $1 921.17/oz, “along with this recycled gold also came increased diamond recycling,” Ehrlich said. “If economic conditions deteriorate, we should expect not only subdued demand but additional diamond supply from recycling.”

GOLD PRICE RALLY
Citigroup gave a laundry list of positive gold price drivers, including rising risks of a global recession and the likelihood that the Federal Reserve will reduce US interest rates to zero.

“We expect spot gold prices to trade stronger for longer, possibly breaching $2 000/oz and posting new cyclical highs at some point in the next year or two,” analysts including Aakash Doshi said in a note received September 10. That would exceed the record of $1 921.17 set in 2011.

Low or lower-for-longer nominal and real interest rates; global recession risks -- exacerbated by US-China trade tensions; and heightened geopolitical rifts are “combining to buttress a bullish gold market environment,” the bank said. Also, “in affinity to our US rates research colleagues, we believe the Fed will ultimately end up cutting rates all the way to zero,” the analysts wrote.

Gold hit a six-year high this month as central banks ease policy to address the slowdown in growth amid the trade war. This week, investors expect the European Central Bank to unleash more stimulus, while next week the Fed is seen cutting rates again. That’s helped to drive flows into bullion-backed exchange-traded funds as investors track the trajectory of the US economy.

MARKET SIGNALS
“For now, the US consumer and potential growth story is holding up,” Citi said in the note. However, “we remain more concerned about market signals – three-month to 10-year yield curve inversion – and leading indicators that are weakening at the fastest pace since the Great Recession,” it said.

Spot gold traded at $1 491.34/oz on Tuesday, up 16% this year after rising for the past four months. Citi said that it had upgraded its baseline forecasts for gold on the Comex by $125 to $1 575/oz for the fourth quarter, and by about 14% to $1 675 for 2020.

In July, US monetary policy makers reduced borrowing costs for the first time in more than a decade, and they are widely expected to do so again at their September 17 to 18 meeting. BNP Paribas, which is also bullish on the outlook for bullion, said it expects four quarter-point reductions over the coming year.

Citi’s outlook did come with caveats, including a hawkish turn from the Fed or a breakthrough in trade talks, although that’s not its base case. “A surprise trade deal coupled with a sharp upturn in global manufacturing data would probably suggest a peak for gold at the $1 550/oz level for this cycle.”