Commodity Price Forecast - Gold: Consolidation, But Uptrend Intact - 22 MAY 2017

BMI View: We have revised down our 2017 average price forecast to USD1,250/oz from USD1,300/oz . R eceding risk aversion in Europe and hawkish language from the US Federal Reserve will cap gold demand in the near term . Nonetheless, we still expect gold prices to grind higher in the long term .

Short-Term View (three-to-six months):

We expect gold prices to consolidate as the bullish sentiment that built up over April is unwound, before rebounding later in the year. Several factors look set to limit gold demand in the near term. Most importantly, language from the US Federal Reserve (Fed) suggests that it could raise US interest rates by more than the one further 25 basis point (bp) hike we are forecasting. For instance, the December 2018 Eurodollar contract is pricing in between 50-75bps of additional hikes this year. Such an aggressive hiking trajectory would occur in the face of fading US inflation and economic growth expectations, thereby sharply raising real rates (nominal rates minus inflation) and undermining the attractiveness of holding precious metals as an investment. Elsewhere, near-term risks to eurozone stability have receded following the victory of centrist candidate Emmanuel Macron in the French presidential elections on May 7. Combined with a moderation in confrontational foreign policy rhetoric from the Trump administration in May, a 'market friendly' election result in France is helping to unwind demand for gold to hedge against political risk. According to the World Gold Council, European flows in gold ETF products were particularly strong in Q117 and some of these holdings are now vulnerable to liquidation. Finally, a bullish extreme in sentiment towards silver prices is unwinding, which will also knock appetite for gold prices in the near term.

Consolidation For Now
Spot Gold, USD/oz (weekly chart)
Source: BMI, Bloomberg

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