(Kitco News) - “The first nail in the coffin is in” for gold, say analysts at BNP Paribas, who recently adjusted their gold forecast lower for the year.
Despite gold’s positive run so far in 2016, analysts from the French bank remain pessimistic on gold prices this year and the next; so much so, they are calling for sub-$1,000 gold.
“We adjusted modestly our gold forecasts downwards. We now see gold averaging $960/oz in 2016 (-$15/oz revision) and $860/oz in 2017 (-$40/oz),” said Harry Tchilinguirian, global head of commodity markets strategy, and Martin Squires, global head of commodity hedge fund sales, in a research note Monday.
In the first two weeks of the year, turmoil in the Chinese economy, coupled with volatile equity markets and weaker oil, pushed gold prices back above $1,100 an ounce as investors sought refuge.
However, the analysts pointed out that gold’s safe-haven appeal, which has supported prices so far this year, will not be enough for a sustainable rally.
“Bouts of safe-haven demand that lent support to gold at the end of 2015 spilled over into early 2016…But safe-haven support is likely to prove transient,” they said.
“Gold’s secular downward trend is still entrenched, reinforced by deflationary pressures. Reasons to expect strong spot return are hard to come by, keeping investor demand at bay,” they added.
One of the main reasons for lower gold prices, the analysts continued, is due to the U.S. Federal Reserve’s plan to continue raising interest rates.
“[O]ur economists expect three more hikes this year, the first of which may possibly come in March. The latest FOMC minutes show a strong bias towards gradualism,” they noted.
According to the analysts, inflation and commodity prices would need to pick up, and the U.S. dollar would need to weaken in order for gold prices to rise sustainably. “None of the items above seem likely in 2016,” they said.
Despite this, there is still a chance for gold to rally nearly $40 from current prices over the next few months, they noted.
“With risk aversion still present, we not preclude the possibility of a rally in the gold over the next three months towards $1150/oz,” they said.
“We maintain our recommendation to short the upside through out-of-the-money calls, notably Jun’16 and Dec’16 1175/oz strikes,” they added.
U.S markets were closed Monday in recognition of Martin Luther King Jr. day. February comex gold futures settled lower by $1.80 at $1,088.90 an ounce.
By Sarah Benali of Kitco News; sbenali@kitco.com
Follow me on Twitter @SdBenali
