UBS lowers gold price forecast but recent decline ‘overdone’

Otmane El Rhazi from The Bullion Desk.

UBS has revised its short-term gold price forecast lower but said that recent declines in the metal are overdone.

Spot gold dropped to four-year lows last week at $1,131.70 but rebounded strongly on Friday. It was last at $1,171/1,172.80 per ounce, down $6.80 loss on Friday’s close.

The bank has altered its one-month price target on the metal to $1,180 per ounce from $1,250 previously but kept its three-month forecast unchanged at $1,200.

It lowered its average price forecast for the full year to $1,230 from $1,270 but left its 2015 average forecast at $1,200.

“Although our new one-month price is lower than our previous forecast, it reflects a recovery from an overdone move to the downside,” UBS said in a note on Monday.

“The combination of weak sentiment, light positioning and extreme amount of shorts suggests that any surprise upside catalyst or increase in physical demand is likely to result in a more sizeable price move,” it added.

Gold fell too far and too quickly – dropping as much as $124 from its peak in October – without any internal or fundamental justification, the bank said, attributing the move to a reaction to external factors.

“Understandably, the sharp appreciation of the US dollar following the BOJ easing was a strong blow to gold. But the weak sentiment towards gold was not because of the metal itself but as a derivative of investors’ view on the dollar,” it said.

“The move lower was also exaggerated by the fact that liquidity in the gold market has been particularly poor of late,” it added.

As the end of the year approaches, investors are becoming more protective of year-to-date performances. This suggests that willingness to trade and take positions will become even more limited both in size and period, it said.

Gold prices around $1,200 in a three-month timetable should provide good selling opportunities, it added

“Beyond our forecast period, we would expect downward pressure to resume as market participants anticipate the first Fed rate hike,” UBS said note.

“The year ahead will continue to be challenging for gold, but while a breach of $1,100 cannot be ruled out with certainty, we maintain our view that gold does not deserve a price below this level, especially for a sustained period,” it added.

Risks to the this forecast include weaker-than-expected seasonal demand out of China, acceleration in the dollar’s appreciation and consistent sizeable liquidations in gold exchange-traded funds..

A surprise ‘yes’ vote in the Swiss ‘Save Our Gold’ referendum would act as the strongest tailwind for gold but the bank downplayed the likelihood of this outcome.

(Editing by Mark Shaw)

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