(Kitco News) - Gold prices should continue to struggle in the short-term as investor demand remains weak, according to Michael Widmer, metals strategist at Bank of America Merrill Lynch.
Gold managed to recover some lost ground after April’s massive selloff; however, prices are struggling to maintain their momentum. As of 12:32 p.m. EDT Thursday, spot gold was trading at $1,468.50 per ounce, down $5.90 on the day.
Although physical demand for gold remains strong, especially in Asia, Widmer said that investors will have to jump back in to create a sustainable rally in gold prices.
“I think investor demand is going to be important and right now we just don’t see a lot of it,” he said. “This short-covering rally can continue but if people didn’t buy gold at $1,600 why would they do it again.
“I think there is the possibility that prices could drop to $1,200 in the first half of the year,” he added.
Analysts have been using exchange-traded products, like SPDR Gold Share EFT (NYSE ARCA: GLD), which is backed by physical gold to gage investment sentiment. Since the start of the year more than 298 metric tons of gold has been redeemed from the SPDR gold trust.
Widmer said the two biggest factors hurting the gold market are the strong rally in equities coupled with growing investor optimism. He said the gold rally was the result of the financial crisis and there was a strong fear sentiment of global currency devaluations, an economic collapse and high inflation expectations; however, none of those fears has become reality.
Because those fears never materialized, investors felt more comfortable taking bigger risks in the equity market, he added. Although a drop in equities might provide some momentum to gold prices, Widmer said the impact would be limited.
Although equity markets are seeing some profit taking Thursday, both the Dow Jones Industrial Average and the S&P 500 Index have made new records. On May, 1 the S&P 500 closed at 1,582 and since then prices have rallied 2.7% as of Thursday afternoon; the Dow has also rallied 2.7%, despite Thursday’s price action. Year-to-date the S&P index is up 14% and the Dow is up almost 15%.
“Equities are a major competitor for gold and they could still move higher in the near-term,” he said.
Although gold prices could dip even further in the near-term, Widmer said they are expecting prices to recover in the second half of the year and could end 2013 at $1,700.
He said they are looking at a few scenarios that could help propel gold. The first is a rise in global inflation and the second is emerging markets intervening in currency markets and then diversify their holding with more gold and less U.S. dollars. The stronger emerging currencies would also be inflationary, which would be positive for gold prices.
Widmer added that they will be watching China closely to see if they start buying more gold as their currency starts to strengthen.
“There are a few scenarios we are looking at but we just don’t see them materializing until the second half of the year,” he said.
By Neils Christensen of Kitco News firstname.lastname@example.org