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Investor Demand For Gold Remains Key Ingredient For Bull Market – BofA Merrill Lynch

By Sarah Benali of Kitco News
Wednesday February 18, 2014 3:00 PM


(Kitco News) - As gold prices fell below key support levels this week, Bank of America Merrill Lynch (BAML) said that investor demand, especially in jewelry, remains the critical ingredient for a gold bull market.

“While the importance of physical gold buying especially from the jewelry sector should increase going forward, we believe that investor demand is a critical ingredient to a bull market for now,” BAML analysts said in a report Wednesday.

“Our supply and demand models suggest that price support around [$1,200/oz] can be justified as jewelry demand manages to absorb mine and scrap supply, as long as investors do not liquidate positions,” they added, noting that liquidations from investors have slowed compared to 2013.

However, they said that given current market conditions – a stronger U.S. dollar, benign risk levels, pressure on commodities and higher real interest rate levels amid falling inflation expectations – demand for the metal has been muted.

“[I]nvestors remain the marginal price drivers [for gold] and sustained rallies are unlikely without a pick-up in non-commercial demand,” they said. “Against this backdrop, we note that practically all of the usual macro-economic variables, including USD and real interest rates, but also risk levels and S&P GSCI have not provided an incentive to increase gold holdings of late.”

In the report, BAML maintained that a hawkish U.S. Federal Reserve remains to be the persistent headwind for gold prices this year.

“In our view, the impending normalisation of monetary policy in the U.S. has capped gold prices and could indeed push gold down $1,150/oz in the coming weeks,” they said.

However, they noted that although many expect a U.S. rate hike in June, they would expect it to happen a little later, which would be a bullish trigger for gold.

“While the U.S. central bank remains intent to raise the policy rate, we see a risk that low inflation and slowing job/activity growth could lead to a ‘later move’ than September. In turn, this would be a trigger for a meaningful gold price appreciation,” they said.

BAML said that they still expect gold prices to average around $1,238 an ounce in 2015, listing sustained emerging market demand, subdued mine supply growth and buyers coming back into the market as the main drivers for gold prices this year.

By Sarah Benali of Kitco News sbenali@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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