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(Kitco News)¬†- Societe Generale said Tuesday that was lowering its forecast for average gold prices in 2013 to $1,700 an ounce, although it remains “moderately bullish.”

The bank looks for the Federal Reserve to continue its quantitative easing program in which it buys Treasury and mortgage-backed securities in a bid to push down long-term market-set interested rates, which in turn tends to support gold. There were worries that QE might end sooner than once thought as gold fell late last week following the release of minutes of the December meeting of the Federal Open Market Committee.

“The very poor price action of gold recently and lack of bullish triggers leads us to moderate our expectations for gold and silver prices,” Societe Generale said. “We remain moderately bullish, and are looking for a similar trajectory to our gold and silver forecasts‚Ķalbeit at lower levels than hitherto and now expect gold to average $1,700 in 2013 compared to an earlier forecast of $1,800, and silver $31 ($34 previously).

The bank noted that exchange-traded-fund inflows have slowed. Investors added just 9 metric tons to their holdings during December, with a daily average of less than half a ton, well below the November rate. “Daily dollar flows in 2012 amounted to $15.9bn, at an average of $61mn per day,” the bank said. “In December, the daily average was just $25mn per day.”

Comex speculative length has fallen since late November, with the number of shorts increasing, although the bank describes the market as “relatively well balanced: with “no sizeable excess overhang.”

Gold tumbled last week after the release of the December FOMC minutes were construed by some to mean QE could end before the end of the year. However, Societe Generale said its economists expect “more rather than less buying” of bonds by the Fed.

“Most primary dealers--including ourselves--believe that asset purchases will continue through the end of the year, and possibly beyond,” Societe Generale said. “This view was put in question last week after the successful resolution of the fiscal cliff and the hawkish tone of the FOMC minutes. Additionally, the annual rotation of voting members also brings a potentially more hawkish bias. Yet, despite all of the above, we still see good reason to believe that asset purchases will continue through the end of the year.”

As a result, Societe Generale has maintained a call for $540 billion of Treasury purchases in 2013, or $1.02 trillion of total balance sheet expansion, including mortgage-backed securities.

“Fiscal restraint is likely to dampen growth at the start of the year and a decisive break above trend--and a significant improvement in the outlook for employment--is unlikely until the second half of the year,” the bank said. “As for the FOMC makeup, we believe the core of the committee--i.e. the votes that really matter--has a more dovish bias.”

Meanwhile, Societe Generale said lower prices have prompted increased physical buying of gold, with bargain hunting appearing in a number of regions.

By Allen Sykora of Kitco News; asykora@kitco.com

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