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Citi Sees 10% Chance of Gold Downturn; 25% Chance of $1,400

(Kitco News) - Citi Research is upbeat on gold in the near term, listing a “base case” call of $1,325-an-ounce metal for the third quarter.

The bank said market expectations for tightening by the Federal Reserve have died down, which tends to underpin gold. Still, Citi economists look for a potential hike in December.

“This might keep gold from pricing aggressively in 4Q’16 absent a sell-off in the U.S. dollar,” Citi said.

Citi said Asian demand was weak in the first quarter but looks for this to improve. “We expect a seasonal rebound in Asian demand in 2H’16,” Citi said.

Citi also said exchange-traded-fund holdings of gold, up some 100 tonnes per month this year, should remain “robust” in the near term.

The bank issued a research report listing three possible scenarios for the market, with analysts saying they “are constructive on the short-term price outlook” but then look for prices to moderate.

Citi’s “base-case” scenario, for which the bank listed a 65% probability, calls for $1,325 gold in the third quarter and $1,280 in the fourth. This is up from prior base-case forecasts of $1,300 for the third quarter and $1,250 for the fourth. The bank’s base case calls for just one U.S. rate hike into end of the year.

“A combination of a weaker US dollar in 6-12 (months), as well as a return of previously deferred Asian demand, should continue to support gold prices in 2H’16, though there is clearly an even more bullish case if the USD rallies too aggressively,” Citi said. “We see the ETF (exchange-traded-fund) sector relatively resilient and able to build on holdings.”

The bank listed a 25% probability for a more bullish case that calls for $1,400 gold in the third quarter and $1,425 in the fourth. This would be the case if there is “a possible severe exacerbation of already elevated U.S. and global growth concerns, further yield compression, Fed delays/USD softness, and asset market draw-downs could send prices to new YTD (year-to-date) peaks.”

Meanwhile, Citi listed only a 10% chance of a bear-case scenario that would include an “outsized” rebound in equities, much stronger U.S. dollar and hawkish Federal Reserve. This would mean $1,075 gold in the third quarter and $1,000 in the fourth, the bank said.

“At present, our economics team views the risk of recession is higher than a strong upside surprise to
global growth, so we have weighted a higher probability to our bull case than bear case,” Citi said. “To the extent the Fed is biased to stay more dovish, which our U.S. econ team notes, despite a December hike baseline, then that could further keep Comex gold prices supported, particularly as U.S. rates compress to record lows.”

Meanwhile, Citi said it looks for silver prices to correct lower on profit-taking, averaging $18.30 in the third quarter.

By Allen Sykora of Kitco News;



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