Gold prices will continue to sag into the start of 2016 while a strong dollar and low inflation continue to pressure sentiment, JP Morgan said.
In a research note on Thursday, the broker lowered its average gold price forecast to $1,050 for the fourth quarter of the year and to $1,040 for 2016. The spot gold price was last at $1,130.80/1,131 per ounce, down $2 on Wednesday’s close.
“While in the near term gold prices may receive some greater strength than we were previously anticipating as global growth worries and concerns about the ramification of the strong US dollar make a first Fed hike in September less probable, the conviction by the FOMC to raise rates has not materially wavered,” it said.
While the Fed may not tighten policy in September, the probability of a first rate rise this year remains high, capping any price strength that a delay may stimulate, it added.
While safe-haven appreciation has the potential to re-emerge throughout the rest of the year, it will mainly be a short-lived diversion from gold’s continued grind lower in the coming quarters, JP Morgan also said.
Even if anxiety over global growth continues to build, investors will eventually choose the relatively higher liquidity achievable through holding cash and governmental bonds rather than gold, it added.
“Safe-haven demand in itself has a limit in terms of how much it can support prices before gold itself becomes too risky to hold,” the broker said
As well, gold’s supply and demand fundamentals are bearish. Although it expects demand to improve into the seasonally stronger fourth quarter, inventories remain high in India, which vies with China for the title as the world’s largest consumer of the metal.
Looking forward, further EM currency depreciations could continue to lessen demand for gold while prices denominated in local currencies become more expensive, as has been the case in Turkey.
If prices were to stay below $1,100, almost 25 percent of production would be loss-making, JP Morgan noted.
According to Metals Focus, almost 75 tonnes will be removed from global supply in the next 12 months because of cost-related closures.
“While we remain bearish prices in the near term, this thinning supply profile will likely have more bullish ramifications later in the decade as more fundamental commodity S/D factors (a supply gap) gain more influence on pricing,” it said.
The broker now forecasts silver to average $14.08 in the first quarter of 2016 and $14.65 for 2016 as a whole. Silver recently traded at a little-changed $14.69/14.74 per ounce.
“Silver prices will broadly continue their bearish trend for the coming two quarters before finding greater strength in the second half of 2016,” JP Morgan said.
(Editing by Mark Shaw)