Gold prices likely to average $1,350 an ounce in 2017

Swiss bank UBS looks for gold to average $1,350 an ounce in 2017, characterizing the metal as down but not out after significant price declines over the last few weeks.

Strategist Joni Teves said that the bank’s higher gold-price expectation has been tapered to reflect moves across a range of markets after U.S. elections, with expectations that fiscal stimulus will boost economic growth and yields.

In the near term, gold looks fragile and is likely to remain under pressure ahead of the Dec. 14 meeting of the Federal Open Market Committee. A rate hike is widely expected.

“However, given that the market has already moved and positions have been adjusted, we think any further downside from here is likely to be relatively more contained,” said analysts at UBS.

UBS thinks gold is now looking attractive around these levels and would buy into further weakness, gradually building a long-term gold position.

“A few weeks ago, we set our three-month forecast for gold at $1,300; while the recent pressure on the market makes this target look ambitious, we continue to expect gold to make its way back towards this level in the months ahead as the rationale for holding gold from a strategic standpoint remains intact, in our view,” the bank added.

The key for gold, UBS said, will be real interest rates, which is the yield on government bonds –traditionally 10-year notes -- minus inflation.

“A scenario where nominal yields run up yet inflation/inflation expectations also pick up such that real rates remain relatively flat or even compress would remain supportive for gold, especially against the backdrop of lingering macro uncertainty,” UBS said. “A compression in real yields amid easy monetary policy or risk-off scenario would also be positive for gold.”

Still, the bank acknowledges that the downside risk to its base-case scenario has increased. Any downside in gold could accelerate if real yields rise on a sustained basis.