By Paul Ploumis (ScrapMonster Author)

December 09, 2015 04:51:22 AM

(Kitco News) - Commerzbank looks for gold to strengthen in 2016, as it starts to find support once the U.S. Federal Reserve gets its first interest-rate hike out of the way.

The entire precious metals complex fell during 2015, with platinum and palladium hit hardest.

“We expect to see prices perform better in the new year once the Fed has implemented its first rate hike in mid-December, thereby dispensing with one key factor that has been weighing on prices this year,” Commerzbank said. “Supported by robust demand from Asia, gold should climb to $1,200 per troy ounce by the end of 2016. Silver should likewise make gains in gold’s slipstream, especially since rising physical demand will meet with falling supply.

“Platinum and palladium will remain in supply deficit for the fifth consecutive year in 2016, meaning that higher prices are also justified here.”

The bulk of the pressure on precious metals this year was due to the anticipation of a Federal Reserve rate hike, now widely expected next week.

“The bulk of U.S. dollar strength is also likely to have materialized already, thereby dispensing with another factor that has been weighing on prices,” Commerzbank said. “After all, the Fed is only likely to raise interest rates at a very gradual pace and will presumably not tolerate any further sharp appreciation of the U.S. dollar.”

Still, analysts said they figure the dollar is more likely to appreciate than depreciate, keeping a lid on how much precious metals will rise. The bank said it looks for three Fed rate hikes of 25 basis points each in 2016, which would not be even half as many as the first year of the last cycle.

“During the last cycle of rate hikes, the gold price was able to gain by 11% within one year following the first rate hike, despite the subsequent series of rate increases,” the bank said. “Because far fewer rate hikes are expected this time, the gold price should be able to make similarly strong
gains in 2016 even if the U.S. dollar appreciates further, unlike last time.”

The bank said it looks for robust demand growth in China again next year as incomes continue to rise, particularly with limited alternative investments there, particularly if stocks slump. Indian demand was hurt this year by a below-average monsoon season that hurts rural incomes, but this should pick up in 2016 if there is a normal monsoon season, Commerzbank said.

Central banks should remain buyers, analysts added. Further, Commerzbank expects outflows from exchange-traded funds to cease next year, especially now that holdings are at the lowest level since 2009.

“The gold price is likely to bottom out in the first quarter of 2016 and then to start strengthening, at first gradually and later more markedly,” the bank said. Analysts listed average forecasts of $1,100, $1,125 and $1,150 for the first three quarters of 2016.

With the European Central Bank still in easing mode, Commerzbank said it figures the gold price in euros is likely to rise more than gold in U.S. dollars. Commerzbank said it sees gold at 1,165 euros by the end of 2016.

“The silver price should also increase on the back of the recovery we expect the gold price to enjoy,” Commerzbank said. “As with gold, we are likely to see the bulk of the price rise in the second half of the year. By mid-2016, we envisage a silver price of $15 per troy ounce and by the end of 2016 silver should be trading at $17 per troy ounce.”

Fundamentally, the weakness in platinum group metals in 2015 is “virtually impossible to explain,” with Johnson Matthey expecting both markets to be in supply deficits, Commerzbank said. JM looks for another platinum deficit next year, analysts pointed out.

“In our opinion this should drive prices up significantly, especially if supply outages occur again in South Africa at the same time as investment demand picks up more strongly,” Commerzbank said. “We expect to see platinum at $1,100 per troy ounce by the end of 2016.”

Commerzbank analysts said they also anticipate palladium will be in deficit next year, enabling this metal to climb to $700 by the end of 2016.

Courtesy: Kitco News