Winds Are Shifting, Gold To Hit $1,400 In 2019 - BAML
(Kitco News)- The gold market has suffered under the weight of rising U.S.interest rates and a stronger U.S. dollar, but one bank sees a shift coming asequity markets have seen increased selling pressure this this past month.
Analysts at Bank of America Merrill Lynch (BAML) said that inthis current environment they see gold prices pushing to $1,400 an ounce by theend of 2019. Along with their long-term bullish call, the bank also recentlydisclosed a January long call option position on the world’s largestgold-backed exchange traded fund SPDR Shares Gold, (NYSE: GLD) with a strikeprice at $117.
“So far, US real interest rates have been rising dueto a rapid Fed tightening path and muted inflation. In turn, a combination ofhigher US real rates, a robust USD, and muted equity market volatility havepushed gold down this year,” the analysts said in their report. “However,equity markets are already sowing the winds of change and a rising VIX willeventually force the Fed to slow down.”
BAML comments come as gold prices rallies nearly 1%on the day while equities saw a nearly 2% drop across the board. While off itshighs, gold is holding near a three-month high. December gold futures lasttraded at $1,236.60 an ounce, up 0.98% on the day.
Looking at equity markets, the Dow Jones Industrial Average isseeing its worst monthly decline in three years while the S&P 500 is seeing its worthmonthly performance in seven years, according to reports.
Along with rising market volatility, the bank alsosees potential for gold to shine as they see inflation pressures pick up,particularly as U.S. sanctions on Iran boost oil prices. The bank noted thatthe sanctions could push 1 million barrels of oil per day out of themarketplace.
“We believe that the supply shortfall couldpotentially sending Brent crude oil prices close to $100/bbl over the next fewmonths,” the analysts said. “Further pressure on crude oil prices wouldcontribute to increase the upward pressure on inflation.”
Adding to the global inflation picture, the bank saidthat a tighter U.S. labor market and a robust economy should push domesticinflation higher. The analysts noted that higher inflation means that realinterest rates will remain low, reducing gold’s opportunity costs.
Finally, the bank added that the U.S. growing debtand deficits could “super-charge” gold to its year-end forecast.
“Gold prices will not spike until there is ameaningful shift in some the recent market trends. But we believe the spike inthe VIX is already setting the stage for that reversal, while the twin US tradeand government budget deficits could come into focus as we head into 2019,” theanalysts said. “In our view, gold prices could spike quickly to a $1,400/ozhigh next year if global markets perceive that the Fed is about to blinkin its dual monetary tightening policy of higher Fed funds rates and a balancesheet reduction.”
Although BAML is relatively optimistic on goldthrough 2019, they do see potential risks to their forecasts. They noted that gold prices could struggle ifU.S. 10-year bond yields push to 4% next year. The explained that higher bondyields would imply further potential for the U.S. economy.
Another negative would be further weakness in emerging markets,which could reduce demand for physical metal.
By Neils ChristensenFor Kitco News
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nchristensen@kitco.comwww.kitco.com Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.  |