S&P cuts gold price forecasts on weaker sentiment, possible US rate hike

Otmane El Rhazi from The Bullion Desk.

Ratings agency Standard & Poor’s has cut its forecasts for gold on weakened sentiment for the yellow metal and possible US interest rate hike, it said on Monday.

S&P has cut its gold price forecast to $1,150 per ounce for every year in 2015-2017, down from its January forecasts of $1,200 per ounce for every year in 2015-2017.

The $50 per ounce change primarily reflects the reduction in forward curve prices, which are relatively flat over the next two years, and prevailing spot market prices, it said.

Market sentiment for gold has weakened since its previous review, and prices briefly dropped below US$1,100 per ounce in July 2015 for the first time in over five years, it noted.

S&P sees the US 10-year Treasury note yields gradually increasing from 2015 to 2017 in tandem with real US GDP growth, and the significant negative correlation between gold prices and interest rates are expected to continue.

The US dollar is expected to remain strong compared with the currencies of its major trading partners, making gold more expensive in foreign-denominated terms, while the expected subdued global inflation will reduce the appeal of gold as a hedge against inflationary pressures, it noted.

“As such, we see a greater downside risk to prices. However, we acknowledge that various factors are emerging – including global currency and market volatility – which could stimulate demand for gold as a store of value and support higher pricing,” the agency said

But it also added that the strength of the US dollar should benefit most of the gold miners outside the US that have expenses in domestic currencies.

S&P also warned that it will be reviewing its ratings on companies with large exposures to gold, though it expects to take only selective ratings actions after reviewing company-specific factors, including issuers’ flexibility to adapt to lower prices by curbing capital expenditures and shareholder distributions, and their ability to maintain sufficient liquidity.

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