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Gold Expected To Rally In Q4 After September Rate Hike – Capital Economics

(Kitco News) - The gold market could be in for more pain before heading higher as the U.S. Fed could still raise interest rates when it meets later this month, according to one research firm.

In a research note, published Monday, U.K.-Based Capital Economics said that they think the U.S. central bank is still on track to raise interest rates as early as Sept. 17, which could drag gold prices to $1,050 an ounce by the end of the third quarter.

However, Julian Jessop, head of commodity research at Capital Economics and author of the report added that they are still optimistic that gold prices will end the year at $1,200 an ounce.

Jessop also said that it was disappointing gold prices did not push higher in August as fear sentiment over China’s weakening economy caused considerable panic in global markets, pushing down expectations of higher U.S. interest rates and weakening the U.S. dollar.

During the height of the market turmoil, December gold futures only managed to push to a six-week high of $1,169.80 an ounce. Recent data from the Commodity Futures Trading Commission showed that most of those gains were the result of short covering and not from new investors entering the marketplace.

“We suspect that this lackluster response partly reflects the collapse in investor confidence in commodities in general – gold has at least done well compared to other metals (including silver),” Jessop wrote. “Some may also be worried about the impact of a sharp slowdown in key emerging markets, notably China, on household demand for gold. And speculation that the PBOC’s loosening of its controls on the renminbi may mean less need to accumulate official reserves, including of gold, will not have helped either.”

Jessop added that many of these concerns in the overall commodity market are overdone. He reiterated that he expect to see a shallow trajectory of rate hikes, leading to still “historically low [interest rate] levels.”

He also said that the prospect for continued emerging market gold demand remains strong, which should help support prices in the medium term.

Capital Economics also remains positive on silver prices, which has had even more difficulty attracting investor than gold.

“If we are right to be positive about the prospects for gold and for industrial metals, silver should now be set to shine,” said Jessop. “Our end-2015 and end-2016 forecasts for silver are $16.5 and $20 respectively, which would only require the gold/silver price ratio to fall back from around 78 to (a still-high) 70.”

By Neils Christensen of Kitco News;
Follow Neils Christensen @neils_C



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