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BMO: Macro Backdrop To Keep Gold In Higher Range; $1,380 Forecast For 3Q

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(Kitco News) - BMO Capital Markets says the current macroeconomic backdrop is favorable for gold, although market participants have largely already factored in the most favorable development – likely interest-rate cuts in the U.S.

BMO Thursday hiked its full-year average gold-price outlook by 3% to $1,332 an ounce and looks for a $1,380 average in the third quarter and $1,350 in the fourth.

“Tactically, we have a precious bias given current macroeconomic conditions,” BMO said. “We believe gold has moved into a new range, and while much of the recent monetary policy shift was priced in very quickly, we believe asset allocation flows will continue to offer near-term support.

“In a world where overall assets under management are rising, the environment is not in risk-on mode. This is a helpful scenario for gold.”

The central banks of many nations now have an easing bias, BMO pointed out. This tends to underpin commodities – boosting precious metals quickly and industrial metals more slowly, analysts continued. In the case of the U.S., BMO looks for two 25-basis-point rate cuts in the second half of 2019, with the first in July.

“However, with all major economies pointing the same way, this may not be accompanied by aggressive USD [U.S. dollar] weakness, given a lack of other obvious currency alternatives,” BMO said. “Even so, the guide towards looser monetary conditions has been enough to push gold into a new range, and one we believe it will hold while rate cuts persist.”

Already, the bank said, a price range that had been in place since late 2016 has been breached, with gold moving to its most muscular level since May 2013.

“Given the aggression in the move, we do think macro asset allocators have moved very quickly to price in rate cuts even before they happen, as evidenced by rapid ETF [exchange-traded-fund] inflows and addition of length in futures contracts,” BMO said. “However, with a trend towards central-bank de-dollarization accelerating and ongoing annuity demand from ETF flows, we are certainly in a precious-positive environment, and one which should be supportive of gold pricing and gold equities, particularly as the gold price in many producer currencies looks extremely strong.”

Central banks remain noted gold buyers after World Gold Council data showed 651 tonnes of purchases in 2018 – the most since 1971, BMO said.

“This is viewed as being down to three distinct reasons: diversification of holdings, mechanical rebalancing to meet certain thresholds, and a growing discomfort with holding outsized exposure to U.S. dollars,” BMO said. “There is expectation that the higher rate of purchases will be maintained, led by China and Russia.”

Total known ETF gold holdings are up 2.3% over the past two weeks and year-to-date gains are up 3.8%, suggesting investors have already quickly moved to rebalance portfolios, BMO said.

“With rate cuts all but certain, the USD outlook looking weaker, wider assets under management rising as equities increase and yet heightened tensions preventing full risk-on, it is natural to see more capital being put towards gold bullion,” BMO said. “However, we do see we see much of the recent gold move as anticipatory, just that the actual Fed rate cut could be a case of ‘selling the fact.’”

Meanwhile, BMO trimmed its 2019 silver-price forecast by 2% to $15.54 an ounce. Analysts look for $15.75 silver in the third quarter and $16 in the fourth.

“Silver’s relative underperformance to gold continues, and it is becoming increasingly difficult to see what turns this around,” BMO said. “So far, neither better industrial demand or lower mine supply has had any effect. Unfortunately, it seems that the gold:silver ratio no longer has much relevance.

“While gold continues to receive ‘annuity’ demand from macro asset allocation trends, mainly via ETF flows, silver does not, and until this changes, we may be looking at a growing disparity over time. Near term, the ‘precious-positive’ macroeconomic environment is likely to see silver have more torque, though the traditional retail investment base still seems somewhat distracted by the emergence of alternative investment options such as cryptocurrency.”

Meanwhile, BMO said “we may now be past the bottom” in platinum. Analysts called for platinum to average $868 for full-year 2019 and $900 in both the third and fourth quarters.

The market remains in a supply/demand surplus; however, South African mine output continues to be roughly flat. A lack of water and processing capacity will constrain growth in the South African mining sector, BMO said.

“Aside from this, the potential to increase platinum usage in gasoline auto catalysts is increasing as the price spread [with other PGMs] remains wide, while all precious metals should feel some form of investment demand lift from the current global rate-cut cycle,” BMO said.

Palladium remains “without doubt a fundamentally tight market at present” even as car sales struggle, BMO said. However, BMO sees an increased probability of substitution toward eventual less-expensive platinum in auto catalysts, suggesting research and development work is “already well advanced.”

“Longer term, we expect a return to parity with platinum,” BMO said. However, for now, the bank looks for palladium prices to remain well above those for platinum, with palladium averaging $1,452 for full-year 2019 and $1,500 in the third and fourth quarters.

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