What 4-Month Low? BoA/ML Still Sees Gold At $1,400 In Second Half

(July 5th, 2017 - by Neils Christensen)

While gold tries to recover after falling to nearly a four-month low overnight, one bank remains optimistic that yellow metal can still shine in the second half of the year.

In their latest market report, analysts at Bank of America Merrill Lynch said that they remain constructive that gold could end the year around $1,400 an ounce.

“Our view is driven by concerns over global growth, which could lead to an increase of cross asset volatility. In addition, our economists believe that continued Fed rate hikes in an environment of falling inflation may be increasingly difficult to justify,” the analysts said.

However, the comments came before gold broke through key support levels and fell to its lowest point since mid-March. Prices are currently seeing a bounce off its recent lows with August gold last trading at $1,222.30 an ounce, up 0.25% on the day. BAML’s reiterated forecast would represent a gain of more than 14% from current prices.

The biggest factor in gold’s favor is that investors are too complacent regarding market risk, BAML analyst s said. They noted that equity volatility could be too low as there has been a pick-up in the economic policy uncertainty index.

“We believe markets are somewhat too complacent and investors should build positions in volatility-exposed instruments. Broadly, we believe that there are various alternatives to protect portfolios against increasing policy risk and a rapid reversal in investor positioning. Investors could opt to increase their gold allocations,” the analysts said.

While markets are preparing for at least one more rate hike this year, with expectations now well above 50%, the analysts say that the Federal Reserve could be getting a little ahead of itself as a range of indictors point to slowing inflation and a stalling economy.

“Yield curves have flattened, which usually suggest a less robust growth picture. Along with scope for an increase in market distress, this may ultimately make the Fed somewhat less hawkish, which should then also support gold,” the analysts said.

While the American bank is optimistic on gold, the same can’t be said for silver. While the market continues to face dwindling supplies, the analysts said that this will be overwhelmed by weak demand.

They noted that ETF demand and U.S. bullion coin demand are at multi-year lows. The analysts note that a push to $20 an ounce by the end of the year is feasible if the market turns around; however, in reality they see prices remaining range-bound, with support coming in at $15 an ounce. July silver futures last traded at $15.90 an ounce, down 0.85% on the day.