Gold may be under pressure in the run-up to the next Federal Reserve rate hike, but prices are expected to rally by around $200 by the end of the year, according to the corporate and investment banking division of Bank of America.
In a research note Thursday, analysts at Bank of America Merrill Lynch highlighted its recent dip but said there were reasons for optimism. “While tighter monetary policy is not bullish, inflation and a range of uncertainties, including European elections and protectionism should support the yellow metal. As such, we see prices at $1,400 (per troy ounce) by year-end”.
The note further explained that following the initial sharp move on November 8 after the election victory of U.S. President Donald Trump, a number of market participants had taken a “wait and see” approach, suppressing volatility across asset classes.
“The decline in volatility across asset classes is particularly notable given some of the massive policy shifts currently under debate in the U.S. and Europe. In our view, the market seems to be ignoring the large and growing risks of U.S. or U.K. policy mistakes and the upcoming electoral cycle in Europe,” the report said.
Gold is down more than 7 percent since the day of the U.S. election but the precious metal has managed to pare some losses and is up nearly 5 percent since the start of the year. Gold is highly sensitive to rising U.S. interest rates because they increase the opportunity cost of holding non-yielding bullion while boosting the dollar, in which it is priced.
With speculations rife that the Federal Reserve will hike interest rates at its policy meeting next week, gold hit a five-week low on Thursday but remained cautious ahead of Friday’s non-farm payrolls. Analysts expect a strong jobs number could lead to bigger expectations from the Fed for a rate hike.
“Gold remains under pressure as markets await the upcoming FOMC (Federal Open Market Committee) meeting, when the Fed is expected to raise rates,” UBS said in a research note on Wednesday.
“This week, the focus is on employment data. Given recent Fed member comments and current market expectations, the data would need to be significantly weak in order to alter the outlook on Fed policy.”
UBS expects gold investors to stay on the sidelines for now, keeping price action relatively subdued until the next set of catalysts are out of the way.