Gold sell-off not over yet, silver could hit $10/oz – Mitsubishi

Otmane El Rhazi from The Bullion Desk.

The sell-off in gold amid expectations of a US interest-rate rise will continue but the metal may make gains in the second half of the year, Mitsubishi said.

“A relatively strong dollar and expectations of US interest rate rises later this year lead us to the view that the macro-related sell-off in gold is not yet over,” it said in a report on Thursday. “We anticipate another push lower before consolidation and recovery takes place.”

Gold will average $1,210 in 2015, Mitsubishi predicted, trading as high as $1,360 and as low of $950. The price is so far relatively unchanged for the year at $1,189 per ounce after hitting lows of $1,142 in March and highs of $1,307.90 in January.

In the second quarter, gold will average $1,180, it predicted.

But suggestions of a delay to the prospective increase in US interest rates represents a potential upside risk for gold, Mitsubishi added.

The Federal Reserve is locked in a debate on when will be the right time to raise interest rates, which have been near zero since December 2008.

But stagnant inflation data and slack in the labour market continue to steady the Fed’s hand, as well as a slowing world economy that may put the US recovery at risk.

“One upside risk for gold is if US rate rise expectations are pushed out further than the present consensus of September/October this year,” Mitsubishi said.

After the first rate rise, however, gold could make gains in the second half of the year, it added, while a cautious Fed holds off on further rate rises.

“Gold may also be supported by risk hedging amid possible emerging market currency dislocation and the eventual emergence of inflation stemming from earlier quantitative easing,” it said.

In the physical markets, Chinese and India demand, which accounts for around 50 percent of annual consumption, remains exceptionally strong, the report said.

“Going into the middle part of the year, seasonal physical demand in Asia may wane, but opportunistic buying into dips by speculators and physical off takers could continue,” it added.

In silver, Mitsubishi maintains its average price forecast of $16.50 – spot metal was last at $15.85 per ounce after hitting heights of $18.49 in January and lows of $15.29 in March.

“We anticipate further weakness in the second quarter relating to macroeconomic headwinds but an improvement in the second half driven by the pricing out of rate rise expectations and accelerating industrial demand,” it said.

But spot silver could hit multi-year lows as low as $10 if gold suffers from the US interest-rate normalisation, the bank warned.

“From there we believe physical and opportunistic buying will come in to support silver. Overall, in the short to medium term silver is expected to remain undervalued compared to gold from a historical perspective,” it added.

(Editing by Mark Shaw)

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