Bank of America Merrill Lynch has lowered its gold forecast for this year, citing the macroeconomic backdrop and the persistent headwinds to the metal’s prices of late.
It now sees gold averaging $1,122 per ounce this year, down 6.8 percent on its previous forecast, it said in a note on Wednesday. The spot gold price was last at $1,139.10/1,139.50, little changed from Tuesday’s close.
The bank also expects gold to fall below $1,000 in 2016 and to trade at an average of $950 in the first quarter of the year.
“Continued hawkish comments from the Fed against falling inflation are our most notable concern,” the bank said. “The combination of higher nominal opportunity costs and lack of inflation has hardly ever been bullish in the past 40 years.”
Still, the bank believes that gold should stabilise when inflation picks up, which is one reason that it maintains an average forecast of $1,250 for the fourth quarter of 2016 when the US CPI is set to expand by 2.1 percent.
The dollar and real interest rates are statistically the most significant drivers for the gold prices, it also said.
“While tighter US monetary policy is bearish for gold [in the] near term, against the backdrop of subdued inflationary pressure, we believe a hawkish Fed exacerbates headwinds to the precious metals also through exchange rates,” BoA ML said.
It expects the euro to trade at parity against the dollar by the end of the year because of differences in monetary policy between Europe and the US.
“Competitive [currency] devaluations could ultimately bring about a turning point in gold,” it said.
US disinflation is partially driven by dollar strength so dynamics such as the recent devaluation of the yuan do not help the Fed to reflate the economy, it added.
Growing monetary policy differentials between the Federal Reserve and the rest of the world would raise the likelihood of the dollar strengthening further, putting the hawkish US central bank in a somewhat uncomfortable position, it added.
“Acknowledging this, gold prices could bottom out quicker that we currently factor in, if market participants started pricing in a more cautious Fed,” BoA ML said.
(Editing by Mark Shaw)
The post BoA ML cuts 2015, 2016 gold price forecasts appeared first on The Bullion Desk.
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