Gold Rally Could Come To An End - Natixis Dahdah

By Paul Ploumis (ScrapMonster Author)

May 11, 2016 12:39:32 AM

(Kitco News) - Gold could continue to perform well this year as the Federal Reserve pushes back the timing of its next interest rate hike; however, 2017 could be disappointing for investors, according to the latest report from Natixis.

Tuesday, the French bank significantly increased its gold forecast for 2016 and now expects prices to average about $1,185 an ounce this year, a 22% increase from its previous forecast in October. However, the bank is not very optimistic in the long-term, expecting prices to suffer in 2017 as the U.S. central bank raises rates.

For 2017, the bank is expecting gold prices to average $1,060 an ounce, only up slightly from its previous forecast of $1,020.

In an interview with Kitco News, Barnard Dahdah, precious metals strategist for the bank, who was also the top forecast for the London Bullion Market Association for 2015, said that gold’s rally could end in the third quarter as that is when he expects the central bank to continue hiking rates.

“Figures over the past few months suggest that the economic situation in the U.S. is gradually improving and that the worst is behind us,” he said in the report. “We think that an acceleration in U.S. rate hikes in 2017 will leave us with lower prices than we are currently seeing.”

In the near-term, a low interest rate environment will continue to support the gold market, he said.

In the report, Dahdah noted that they don’t expect that the Federal Reserve to hike interest rates in June. He added that April’s disappointing nonfarm payrolls report, which was released at the start of the month, and the fact the Fed meeting is before UK’s referendum to decide whether or not leave the European Union will keep the U.S. central bank on the sidelines until after the summer.

According to the CME 30-day Fed Funds futures prices, the probably of a rate hike next month is at 7.5%.

Investment demand, Dahdah continued, will be strongly dependent on what the Federal Reserve does. He explained that if the Fed does raise interest rates at a faster pace than expected, starting with its June meeting, then it could be bad for the gold market.

“We would also not be surprised if in that case gold prices dropped below $1,000/oz especially in 2017,” he said. “Our biggest concern comes from physically-backed ETFs, which in 2013 showed us that investors can quickly turn from a source of demand for the metal to a source of supply,” he said.

However, if the Fed holds off on interest rates hikes for the rest of the year, especially if China’s economy slows down and its equity market sees another shock, then prices could rise to $1,400 in 2016 and $1,500 in 2017.

Gold was seeing continued modest selling pressure Tuesday with June gold futures last trading at $1,262.40 an ounce, down $4.20 on the day.

Courtesy: Kitco News