ASX 200 gold shares have risen recently on the back of the shock invasion of Ukraine and rampant inflation. But the shine may be starting to come off. A leading broker forecasts a circa 10% drop in the gold price by year-end.
Citigroup is a medium-term bear when it comes to this precious metal. It believes the safe-haven asset will drop to US$1,750 an ounce in the December quarter, reports the Australian Financial Review.
"Our conversations with investors suggest spot price expectations are mixed on a [six to 12 month] view, understandably given the moving parts," the AFR quoted Citi.
"The caveat to our view is should the Russia-Ukraine conflict manifest into a macroeconomic shock, this could provide a more sustained bid for gold."
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Have ASX 200 gold shares hit their peak?
If this prediction comes to pass, it may impact the share prices of gold mining companies such as Newcrest Mining Ltd (ASX: NCM), Evolution Mining Ltd (ASX: EVN), and Northern Star Resources Ltd (ASX: NST).
After all, these ASX 200 gold shares have rallied strongly in the past several weeks, along with the gold price.
Geopolitical tailwinds for gold
But the gold price could stay well supported in the near-term, concedes Citi. This is because the Russian central bank may be forced to buy gold on the open market due to international sanctions.
The country has been cut off from the international banking system and its currency has collapsed. The use of physical gold is one way for Russia to keep trading.
Russia turning to gold
The gold reserves accumulated by Russia are estimated to be worth about US$135 billion. Most of it is held in Russian-controlled territory. It makes Russia the fifth-largest holder of bullion amongst global central banks.
Importantly, Russia is a large gold-producing nation. It was ranked second in the world last year, behind China. Russia's central bank has said it will buy gold directly from Russian refiners.
Are ASX 200 gold shares worth buying?
There are two issues. First, Russia still doesn't have enough gold. This is because Russia is effectively cut off from all major currencies, including the euro. Plus, most of its overseas assets are frozen.
This means Russia's useable reserves may be as low as US$210 billion if only its gold and Chinese yuan reserves are counted, notes Citi.
The other issue is liquidity. It may not be as easy for Russia to trade using gold given it is cast out from international markets.
"Russia being excluded from the London physical gold market (and presumably from the Suisse refining centres) as well as the benchmark Comex bourse, might tighten availability of bullion stocks," says Citi.
The broker has a largely neutral outlook on ASX 200 gold shares. However, it does rate Evolution Mining and Northern Star as buys.
