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Sorry Bugs, Gold Has Seen Its 2016 Peak - RBC Capital Markets

(Kitco News) - Gold has been one of the best-performing assets so far this year, but the metal’s best days of 2016 may already be behind it, say analysts with RBC Capital Markets.

“We reiterate our view that gold prices will weaken, resulting in an annual average price of $1,258/oz in 2016, and $1,241/oz in 2017,” they wrote in a research report Tuesday.

“Upcoming Fed announcements will be key to whether or not our investment thesis stands, but given the investor-only nature of this year’s gold rally, we still think it is tenuous at best, or primed for a correction at worst.”

Since Federal Reserve Chair Janet Yellen and Vice Chair Stanley Fisher spoke late last week, gold prices have been under pressure as rate-hike expectations for this year have grown. December Comex gold futures hit two-month lows Tuesday, and were last trading down $7.50 at $1,319.60 an ounce.

RBC Capital Markets

“After H1 2016 strength, recent price action suggests that the market is beginning to grapple with the fact that year-to-date moves constitute a one-legged rally,” RBC analysts said.

The analysts suggested that gold may have already seen its 2016 peak, especially since this year’s rally can be attributed almost entirely to investment demand.

“ETP (exchange-traded-product) demand has been a key driver given its commensurate rise with prices, but given that the dollar exposure to gold has increased massively beyond the increase in tonnage terms, 74% versus 39% YTD, we think that the room for further allocations is dwindling and that it will be hard to repeat H1’s gains,” they explained.

According to the analysts, other forms of demand may also begin to dwindle in the second half of the year and will further hurt the gold price.

“Given high prices in USD terms and even higher prices in non-U.S. demand centers, we think jewelry demand will be down significantly y/y in 2016. Likewise, industrial and dental demand will likely both continue their secular declines due to consistent substitution effects,” they noted. “Bar and coin demand may be a different story, but it is unlikely that it will prove enough to offset declines in other forms of demand, in our view.”

The analysts recommended that investors look at “selling into rallies” given the unlikelihood that the yellow metal will rise similarly to the way it did during the first two quarters of 2016.

By Sarah Benali of Kitco News; sbenali@kitco.com

 

 

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