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Gold Still Has Plenty Of Upside - Capital Economics

By Kitco News
Monday November 24, 2014 12:01 PM

(Kitco News) - With gold hovering around $1,200 an ounce, commodity analysts at Capital Economics see plenty of long-term potential for the yellow metal as they stick with their call that prices will hit $1,400 an ounce by year-end 2016.

“A rebound to US$1,400 would represent a sizeable 17% gain from current levels at a time when the valuations of many other assets, notably developed market equities and bonds, are looking increasingly stretched,” said Julian Jessop, head of commodity research at Capital Economics.

That target is unchanged from their previous report in October when the analysts said they expect gold hit $1,300 an ounce by the end of next year. In the report, Jessop said gold still has plenty of upside potential as a lot of bad news is already priced in.

“Indeed, given the unfavorable market conditions this year, gold has actually held up remarkably well,” he said in the research note published Monday. “The downside for the gold price from current levels is surely now limited.”

Some of the negatives Jessop lists that have dampened gold recently include a strong U.S. dollar as the Federal Reserve exited its quantitative easing program, the collapse in crude oil prices, reducing inflation fears and stronger equity markets.

“Despite all these negatives, the price of gold has repeatedly found strong support at, or slightly below, the US$1,200 level,” he said.

Jessop said the big unknown and potentially bearish for the gold market is the first Federal Reserve interest rate hike. Capital Economics forecasts that the U.S. central bank could hike rates as early as March, which is much earlier than is currently priced into the market.

However, he said even the first rate hike will have limited impact on the gold market as interest rates are expected to only rise gradually and remain below historical standards.

“The peak in the next interest rate cycle could be less than 4%, a level which previously might have been thought of as a floor for rates. This is unlikely to be a game-changer for gold demand,” he said.

Demand should strengthen among emerging economies as income increases, helping to support gold, Jessop said. Western investors could also jump back into the gold market as a safe-haven investment as geopolitical risks and global economic uncertainty rise, particularly within the Eurozone, he said.

He added that they are also expecting central banks from developing country to continue to add the precious metal to their official foreign reserves. Jessop said that although unlikely he would not completely rule out buying from the ECB as part of its quantitative easing strategy or from the Swiss National Bank. Swiss voters will decide in a Nov. 30 referendum whether or not to force the SNB to increase its gold holdings to 20% of its official reserves within five years.

Jessop appears to be market neutral on gold supply. With gold at $1,200 an ounce, he said that prices are not far above the costs of mining new gold; however, those costs could come down as energy prices start to drop and the industry finds new efficiency savings.

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By Neils Christensen of Kitco News; nchristensen@kitco.com



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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