HSBC downgrades 2015 gold price forecast by six percent

Otmane El Rhazi from The Bullion Desk.

HSBC has significantly downgraded its 2015 average gold price forecast, following the brutal sell-off seen in the market one week ago.

HSBC now predicts that gold will average $1,160 per ounce in 2015 from $1,234 previously. The bank has also lowered its 2016 forecast by five percent from $1,275 per ounce to $1,205.

Nonetheless, the bank still believes that in the end, gold will recover from current levels, it said.

Gold recently slumped to levels not seen since March 2009 at $1,077 per ounce, following a bear-raid on the market during early trading hours in Asia and what was the most illiquid period of business in the week.

“Gold may remain under pressure from a strong dollar and expectations of higher interest rates and low inflation, all of which have fostered pronounced negative investor sentiment. But heavy momentum and other technical selling seem to have taken gold below levels that we think are fundamentally justified,” HSBC said.

The bank however says that this does not necessarily mean that the gold price cannot fall further, particularly in the near term.

“Downward pressure may remain until the Fed raises rates and with important support levels broken gold could tread within striking distance of $1,000 per ounce perhaps as low as $1,025 per ounce,” it said.

The third quarter is widely expected to see the first increase to US interest rates since 2008. Higher interest rates in theory would push many gold investors into more yield-bearing assets such as bonds. GFMS on the other hand believes that much of the action has already been priced into gold, and that the first increase will in actual fact push the metal’s price higher.

The members of the Fed’s policy board are locked in a debate on when will be the right time to raise rates, which have been near zero since December 2008. Since its decision is now entirely dependent on US data, a rate increase could happen at any future meeting. Ten of the 17 voting members expect a rate hike sometime this calendar year.

But lower prices could form the foundations of the next gold rally, particularly as emerging market demand for physical metal reacts to the current nadir, which HSBC will materialise on further price downswings.

“The beginning of the next Fed tightening cycle, especially if it is accompanied by dollar weakness, could also help buoy gold and may trigger a short covering rally,” it said. “So while the pressure may remain on gold in the near term, a rate rise, say, in December, suggests a price recovery in 2016.”

“It is also possible that since the likelihood of rate rises are by now fully digested by the market, gold may begin to rise ahead of a rate rise. This could allow the market to move back up to the vicinity of $1,200 per ounce to $1,225 per ounce towards the end of the year,” it added.

The bank has maintained its 2017 and long-term forecasts of $1,300 per ounce and $1,325 respectively.

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