Gold Price Headed To $1,200 in Mid-2017 - Bank of America Merrill Lynch
Friday December 16, 2016 15:09
Editor's Note: This story was originally published on December 7. It has been updated to reflect today's pricing.
(Kitco News) - It’s surprising how quick sentiment can change in five months, especially as the U.S. prepares to welcome a new President as Bank of America Merrill Lynch (BoAML) says it is now “cautious” on gold for 2017.
Wednesday, in his presentation at the BoAML 2017 Year Ahead Press Conference., Francisco Blanch, head of Commodities and Derivatives, said that a stronger U.S. dollar and higher bond yields will be two major headwinds for the yellow metal next year.
In its updated forecast, BoAML it expects gold to trade around $1,200 an ounce by mid-2017, “implying limited upside near-term.” The Bank’s forecast is not far from current prices as February gold settled the session at $1,137.40 an ounce, up 0.67% on the day.
In his presentation, Blanch added that in general, higher yields could potentially create a toxic environment for the entire commodity complex.
“Higher interest rates are bad for commodity, in particularly when the yield curve flattens,” Blanch said.
Blanch’s subdued tone for gold is a sharp contrast to just five months ago when the bank was calling for gold to hit $1,500 an ounce. The bank increased its 2017 outlook in July after prices hit a 13-month high following the Brexit referendum.
Blanch said that the bank sees two possible scenarios for gold related to Donald Trump’s new presidency: the first is slightly positive where the nation sees a modest increase is deficit spending, which causes bond yields to remain relatively unchanged. The second scenario is more negative as major deficit spending could lead to higher bond yields.
In the bank’s interest rate presentation, Shyam Rajan, head of U.S. rates strategy, said that they see the potential for U.S. five-year bonds to rise sharply in 2017, flattening the yield curve as long-term rates remain subdued.
He added that this rise in shorter-term yields could force the Federal Reserve to be more aggressive in hiking interest rates than the market are currently expecting, especially as the government initiates new fiscal plans.
Another potential headwind for gold is BoAML’s expectation that real interest rates would likely rise in an environment of subdued inflation.
“Ultimately, 2017 is going to be a story of fiscal loosening and monetary tightening; the combination of which will mean real rates are headed higher and inflation break-evens don’t do much,” said Rajan.