Citi Sees 2017 ‘Gold Price Pain Before Gains,’ $1,160 Average
Monday December 05, 2016 11:11
(Kitco News) - Citi Research looks for gold to come under pressure in 2016, with a full-year average price forecast of $1,160 an ounce, and suggests that platinum group metals could outperform the rest of the precious-metals complex.
Republican Donald Trump’s victory in the U.S. presidential election has shifted U.S. dollar and interest-rate expectations higher, analysts said. This in turn points to a bearish gold outlook due to the inverse relationships between the markets.
“Supply fundamentals are little changed while demand hangs in the balance as Chinese and Indian retail trends are at an inflection point,” Citi said in a report released late Sunday. “In the absence of strong structural trends, we expect gold price pain before gains.”
Citi sees gold easing to a second-quarter average of $1,135 before recovering to $1,180 in the final three months of 2017. Silver is seen averaging $15.50 next year.
The bank sees a 65% chance of its base-case scenario, which is for the Federal Reserve to hike interest rates once in December and possibly two times in 2017, if macroeconomic data remain strong.
“The strong U.S. dollar outlook post-Trump and back-up in bond yields is the main driver of our bearish price outlook for 2017,” Citi said. “But geopolitical tensions -- including risks of Euroland breakup --
persist, with a slew of elections and referendums on the horizon. But a potential inflation bid may buttress levels above $1,100/oz.”
Citi lists a 20% probability of a bull-case scenario, under which there are further Fed delays in hiking rates, coupled with U.S. dollar weakness, that could send the precious metal back over $1,300. Citi analysts list a 15% probability of a bear-case scenario greater than their base forecast, assuming there is an outsized rally in equities, much stronger dollar and more hawkish Fed than expected.
Central banks have cautiously added to gold reserves relative to institutional investors, Citi said. Citi cited World Gold Council data showing that central banks have purchased around 271 tonnes of gold for the year to date, down some 34% from the equivalent period last year.
“While total gold reserve holdings have generally increased, the pace of additions has slowed,” analysts said in their report. “It’s likely a dip in prices may see activity from the sector improve next year.”
Meanwhile, Citi said “healthy” global auto sales should buoy sentiment for PGMs. Platinum is forecast by Citi to average $965 in 2017, while palladium is seen averaging $715.
Palladium is used for catalytic converters in gasoline-powered cars, which make up the bulk of the market in the key nations of the U.S. and China. Besides already-strong demand for autos, Chinese consumption of palladium may be further bumped up by stricter emissions standards that potentially boost loadings per vehicle, Citi explained.
“The fundamental story for palladium has improved throughout the year, and we expect to see price
outperformance over platinum continue in 2017,” Citi said.