By Paul Ploumis 19 Aug 2015 Last updated at 04:22:12 GMT
Gold prices are likely to average at $1,090 an ounce in the third quarter and $1,050 in the fourth, says Citi in its latest report.
(Kitco News) - Citi Research sees gold averaging $1,090 an ounce in the third quarter and $1,050 in the fourth, calling for weakness due to macroeconomic conditions.
After moving lower for most of the third quarter so far, the metal bounced last week when China devalued its currency, prompting safe-haven buying and short covering. However, Citi said, it looks for the Federal Open Market Committee to “look past international developments” and still tighten interest rates as early as September.
Higher rates tend to hurt gold by supporting the U.S. dollar and also raise the so-called opportunity cost.
“Certainly conventional wisdom dictates that Fed tightening should be negative for bullion, though history does not always confirm this when considering gold’s performance during previous Fed tightening cycles,” Citi said.
The bank lowered its overall annual average gold-price forecast this year to $1,140 an ounce and trimmed its 2016 outlook to $1,050.
Silver is seen averaging $14.90 and $14.60 this quarter and next. The full-year and 2016 forecasts are $15.70 and $14.50, respectively.
Citi commented that safe-haven buying was “notably absent” for much of the second and third quarters despite a steep sell-off in Chinese equities and a renewal of the Greek credit crisis.
“Though it is clear from our analysis that macro factors alone cannot inform an accurate prediction of gold returns, given our results and the dollar strength expected over the coming quarters, in our view the bias for gold still remains strongly to the downside,” Citi said
Still, the bank cited some supportive influences for gold, starting with news ahead of the weekend that China’s central bank bought 19 metric tons of the metal in July. Globally, central banks have remained “committed to buying gold,” Citi said. Further, lower prices and the approach of gold-buying festivals in key Asian nations like India could trigger more consumption the second half of the year.
However, the bank also cautioned, there is also the risk that cash-strapped nations could be tempted to sell gold. As an example, Citi pointed to Venezuela, which has debt issues.
Longer term, capital-expenditure spending could be a key to prices, particularly with an estimated one-third of all mines losing money, Citi said. This translates into lower future output. Miners tend to curtail production and halt expansion projects at times of weaker prices, rather than shutting down current mines.
“Supply developments are largely unchanged from the prior year, but a distinct lack of mine and smelter capex expansions could encourage a rebound in the mid-term,” Citi said.
Courtesy: Kitco News