By Kitco News
Wednesday December 07, 2016 10:21

(Kitco News) - Credit Suisse has an upbeat view on gold for 2017, calling for the yellow metal to average $1,338 an ounce and draw support from increased trade protectionism, geopolitical-related currency volatility and improved Asian demand.

The bank looks for $1,275 gold in the first quarter and $1,400 in the final three months of 2017. The 2018 forecast was pegged at $1,375 an ounce.

The bank’s silver forecast was $17.80 for 2017 and $18.50 for 2018.

The Credit Suisse outlook, released Tuesday, called for gold to snap back after falling sharply since the Nov. 8 U.S. presidential election. The decline occurred as bond yields rose on expectations that a higher supply of government debt will be issued to fund deficits, as well as increased expectations for Federal Reserve rate hikes to combat inflation. Exchange-traded-fund holdings of gold have fallen 7%. Additionally, weakness in Indian demand played a role in gold’s recent slide, Credit Suisse said.

Looking ahead, Credit Suisse argues against the view of many pundits that U.S. President-elect Donald Trump’s fiscal policies are likely to hurt gold. The market has factored in an expectation that a mix of U.S. tax cuts, deregulation and infrastructure spending will boost the economy, pushing up real interest rates and strengthening the U.S. dollar.

“We counter that trade protectionism and anti-immigration policies are negative for growth and positive for inflation,” Credit Suisse said.

The bank said it sees higher geopolitical risk than a year ago, in turn meaning greater risk of currency volatility, which can spur a flight to safety benefitting both gold and the U.S. dollar. Besides the surprise results in the U.K. Brexit referendum last summer and U.S. presidential election, upcoming elections will occur in France, Germany and the Netherlands.

“The populist movement which has spread across the U.K. and U.S. has generally been underestimated by polls and we would not discount the potential for the anti-EU movement in Europe to gather more steam,” Credit Suisse said.

Meanwhile, the bank said trade protectionism in the U.S. could spread to Europe.

“Protectionism is generally bad for growth and adds inflation due to tariffs and/or inability to import cheaper goods, a situation which would result in a deeper negative real rate environment,” analysts said.

Also, Credit Suiise expects Chinese and Indian demand to rebound following a weak 2016. 

“In China, we believe the government's efforts to curb capital outflows and concerns regarding local inflation will support gold demand as a store of wealth….The Indian government's decision to de-monetize cash on Nov. 8th may have hurt near-term gold buying, but we believe it reinforces the investment case for gold among Indian buyers, who already have a strong affinity to the metal. The recent price pullback should also stimulate Indian buying, where consumers had to cope with the highest local currency gold prices since 2012 for most of 2016. “

U.S. budget deficits and concerns about the euro could spur further central-bank buying, Credit Suiise said.

Meanwhile, mine supply is likely to remain “challenged” in 2017, Credit Suisse said, forecasting 6% decline by 2018 since the free cash flow that the industry generated in 2016 has gone largely to balance-sheet recapitalization rather than investment in exploration and new projects. Output in 2016 likely declined by around 0.5%, Credit Suiise said.