(Kitco News) - Gold prices are expected to feel more pain in 2016, at least in the first half of the year, however rising inflation in the second half should be supportive for the beleaguered market, according to Bank of America Merrill Lynch.
In an interview with Kitco News, BofAML metals analyst Michael Widmer said that they 
aren’t expecting to see another 30% drop in gold; however, prices could end up falling below $1,000 an ounce in the first quarter of the year.
In its latest forecast, the bank is looking for gold prices to average about around $1,088 an ounce in 2016. The first half will see the most weakness with prices averaging around $950 an ounce in the quarter and $1,050 an ounce in the second. However, prices should start to rise in the second half of the year with the bank expecting an average price of $1,100 an ounce in the third quarter and $1,250 an ounce in the fourth quarter.
“There are still good reasons to be bearish on gold, at least in the first half of the year,” he said.
The bank’s report also noted, “[T]he Fed’s hawkish stance not only impacts gold through USD, but also affects the metal because higher policy rates increase opportunity costs, an issue given that gold is a non-yielding asset. Rising nominal rates weigh even more at present because a range of inflation indicators have been muted.”
However, Widmer added that if higher U.S. interest rates are accompanied with rising inflation then the gold market should at least stabilize by the end of the year.
“If I need to pick one factor necessary to turn around the gold market is the need for higher inflation,” he said.
Widmer said that he is optimistic that inflation could start to rise as he expects oil prices to at least stabilize. He noted that inflation tumbled this year as oil prices fell 50% from 2014; however, even though the crude oil market remains weak, with prices recently falling to new multi-year lows, Widmer added that big price drop has passed.
“Year-over-year inflation changes should be positive as the oil market stabilizes in 2016,” he said.
Another major factor that could be positive for gold in the second half of the year will be less aggressive monetary policy action from the Federal Reserve, Widmer noted. Although the U.S. central bank will be embarking on its first rate hike cycle in more than nine years, BofAML is expecting to see a low trajectory in interest rates.
“While the Fed will in all likelihood start normalising rates, given the steady U.S. labour market, we see a risk that the U.S. central bank may ultimately be forced to be less hawkish, which in turn would reduce headwinds to gold from rates, disinflation and USD,” the report said.
By Neils Christensen of Kitco News; nchristensen@kitco.com
Follow me on Twitter @neils_C
