RBC See Potential For Gold In Second Half Of 2015, Sticking With $1,250

In a report released Friday, RBC is sticking with its call that gold prices will average $1,250 an ounce for 2015, expecting to see prices push higher in the second half of the year after the Federal Reserve’s much-anticipated initial rate hike.

The Canadian bank said that potential interest rate hikes remain the dominant force for the gold market this year and there is a risk that prices remain subdued in a low inflation environment during the next four months.

“We have a concern that a first hike over the coming month against the backdrop of very low headline inflation could result in continued weakness of the metal…,” the bank said in its report.

The report explained that a potential hike in September will result in a rise in real interest rates, hurting gold as it raises its opportunity costs. However, this could only be a short-term factor; the bank also noted that interest rates are expected to be much lower compare to historical norms. RBC is expecting the U.S. central bank will hike rates by 2% over the next two years.

“While we could see an increase in real rates if the Fed begins to raise rates and if the U.S. economy remains strong, it could be a slow grind higher as the global economy remains fragile and demographic shifts pressure real rates,” the bank said.

Once the market gets past a September rate hike, RBC expects seasonal factors to be the dominant theme, with strong physical demand from India and China helping to drive prices higher by the end of the year.

Looking ahead, the Bank added that improving inflation expectations should also be an important factor for the gold market, driving prices to $1,400 by 2018.

“Given the amount of quantitative stimulus in many of the key demand markets for gold, we believe inflationary expectations could begin to increase into 2016 and improve the fundamental demand for gold,” the bank said.

The bank appears to be slightly more optimistic regarding the gold market as it lists six factors that create some upside risk to their 2015 outlook: a delayed Fed rate hike, Greece defaulting on its debt and being forced out of the eurozone, heightened geopolitical risks, more Chinese stimulus, weaker global equity markets and higher oil prices.

“Under an upside scenario, that we believe could have a 30% probability, we would expect gold to trade in a $1,300/oz to $1,400/oz range in late-2015 and early 2016,” the bank said.

At the same time the bank only sees three factors that could create some downside risk to the gold market: a Fed rate hike in June, weaker Chinese currency and central bank liquidation.

“Under a downside scenario, that we believe could have a 20% probability, we would expect gold to trade in a $1,050/oz to $1,200/oz range during the balance of 2015 and early 2016,” the report said.

Strong Demand From Asia, Developing Central Banks

Demand from both India and China are expected to play an important role in the gold market, supporting prices above $1,200 an ounce. RBC is expecting India to be the dominant player in the gold market once again as Chinese demand is expected to  stay put at 2014 levels.

“Overall, the confidence the country has in the leadership of Prime Minister Modi and the positive trajectory of the Indian economy appears to be supportive for gold demand,” the bank said. “We believe that there is the potential for a significant rebound this year.”

Along with strong demand from India and China, RBC also expects Central Banks in developing countries to continue to be net buyers of gold, albeit at a slower pace. The bank forecasts that central banks will purchase 250 tonnes of gold this year, down from 371 tonnes bought last year.

“We expect the developing countries to continue to expand their holdings as these are still significantly underweight, compared with the developed world central banks,” it said.

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