Gold's Bull Market Over; Prices To Fall In Next Two Years - NatixisBy Kitco News
Wednesday October 12, 2016 11:26
(Kitco News) - Unprecedented investor demand that helped drive gold prices almost 30% higher this year is expected to come to a halt as the market deals with higher global interest rates in the next two years, according to one French bank.
Natixis’ precious metals analysts Bernard Dahdah, who was named the London Bullion Market Association’s top gold forecaster in 2015, and Alomgir Miah said in a report Wednesday that they see more headwinds for gold and silver in 2017 and2018.
The analysts said that they expect gold to average $1,180 an ounce next year, with prices falling to an average of $1,100 in 2018.
At the same time, silver prices are expected to average $15.70 an ounce in 2017 and then $13.20 an ounce the following year.
The forecasts are well below current prices with December Comex gold futures last trading at $1,255.40 an ounce, relatively flat on the day. December silver futures last traded at $17.50 an ounce.
“For 2017 and 2018, we think that the biggest factor influencing the price of gold is the expected path of U.S. interest rate hikes,” the analysts said. “Also, we do not expect further rate cuts by the [European Central Bank] or [Bank of Japan] as this is likely to damage their banking system especially in the case of Europe.”
Natixis economists are expecting to see the Federal Reserve raise interest rates by 25 basis points three times next year: June, September and December.
Not only will higher bond yields raise gold’s opportunity costs but they will also boost the U.S. dollar, providing another headwind for the precious metals, the analysts explained.
In this environment, the analysts warned that gold investors need to keep an eye on gold-backed exchange-traded products as they expect to see a resumption of investment outflows.
“Although demand for gold from physically backed ETPs has provided a substantial boost to gold prices, we expect the trend to reverse and for investors to become a source of supply of the metal,” they said. “At current levels, the total amount held in physically backed ETPs is equivalent to roughly 60% of 2015’s mined output and 47% of that year’s total production. As we saw in 2013 when 850 tonnes of gold exited physically backed ETPs, the effect on gold prices can be very negative.”
Unlike the past three-year bear market, Natixis is not expecting to see strong physical demand from India or China to help support prices.
They added that the Indian government’s gold tariffs are expected to continue to curtail domestic demand.
“Should tariffs be reduced, we could expect a stronger return in demand for Indian gold, but we believe that the current government will keep the tariffs unchanged as it pushes for its gold scheme to gain further momentum,” they said.
At the same time, a slow and steady decline in prices will keep Chinese investors out of the market.
“As we do not expect an extreme drop in prices, our view is that Chinese demand for gold is likely to improve next year on the back of lower prices, which would help slow down the drop rather than help lift prices,” they noted.