Citi lowered its average gold price forecasts for this year and 2016 as weak macro themes and short-term fundamentals dominate the market, it said on Tuesday.
The bank now forecasts gold prices to average $1,090 per ounce in the third quarter of this year, slipping further into the fourth quarter to $1,050. The bank forecasts an annual average price this year of $1,140 and $1,050 in 2016.
The spot gold price was last at $1,111.2/1,111.5, down $5.80 on the previous close.
After testing $1,080 in the first week of August, gold prices rallied 1.7 percent last week after a surprise devaluation of the Chines yuan sparked renewed safe-haven buying and prompted short-covering in gold, which had recently reached all-time lows in COMEX money manager net length.
But despite recent market volatility, Citi said the Fed will look past international macro developments, focusing instead on positive trends in US labour data, and therefore continue to see September Fed interest rate lift-off as the most likely scenario.
Citi said it sees continued strength for the dollar as the Fed begins tightening, with the dollar index expected to breach 104 over the next several quarters.
“If this appreciation manifests, then we are likely to be in for more pain in gold markets even after the first hike takes place,” it said in the report.
“On the other hand, while there may be a risk-on/risk-off argument to be made for supporting bullion prices, our analysis indicates that in the absence of a severe crisis in global financial markets, gold should find little sustained support from risk-off flows,” it added.
Aside from last week, safe-haven gold-buying has been notably absent through most of the second and third quarter, particularly during the Chinese equity sell-off and at the height of the Grexit crisis, it noted.
“Macro factors alone cannot inform an accurate prediction of gold returns, given our results and the dollar strength expected over the coming quarters, in our view the bias for gold still remains strongly to the downside,” it added.
(Editing by Martin Hayes)
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