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BNP Paribas Sees Mid-2018 Rally In Gold, Then Price Retreat

Kitco News

Editor's Note: The one-month countdown begins as Kitco News prepares to launch its popular outlook series December 15.

(Kitco News) - BNP Paribas looks for gold prices to start 2018 weak, rally into mid-year on low real interest rates, but then turn lower as nominal rates rise.

In an outlook report released Friday, the French bank listed a 2018 average gold forecast of $1,255 an ounce, the same as analysts expect this year. However, BNP Paribas’ quarterly average forecasts show that analysts expect prices to oscillate during the course of the year – falling to an average of $1,210 in the first quarter, rising to an average of $1,325 in the second, then falling to $1,265 and $1,220 in the final two quarters of the year.

The bank sees a “very strong possibility” of a U.S. Federal Reserve interest-rate hike in December, then three more next year, based on policymakers’ revised view after their last meeting that the economy is now “solid,” an upgrade in communication from “moderate” previously. BNP Paribas also sees acceleration in the drawdown of the Federal Reserve’s balance sheet.

Currently, markets are pricing in only one rate hike, with a less-than-50% chance of a second hike, by September of 2018.

“Though a December rate hike is widely anticipated by the market, there is perhaps room for some dollar appreciation in the next months, helping to extend a little further the recent pullback in gold’s price into next year,” BNP Paribas said.

“Against a steady and most likely prudent pace of rate hikes, y/y [year-on-year] changes in U.S. inflation which will drive real rates, thus the opportunity cost of holding gold. U.S. inflation is anticipated to remain subdued in the very near term before rising to a peak sometime in the middle of next year and easing back thereafter. This would suggest real rates working against gold in early and late 2018, but supportive of a mid-year gold rally.”

Analysts described most metrics of gold demand as weak, commenting that inflows into exchange-traded funds are “seriously lagging” those from 2016, with investors instead favoring the strong stock market. They also cited World Gold Council data showing that global jewelry demand fell year-on-year in the third quarter.

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