NEW YORK (Scrap Register): BNP Paribas has upwardly revised its outlook for gold on scaled-back expectations for Federal Reserve monetary tightening, although analysts also do not forecast a big rally from current levels until sometime next year.
In a research report Tuesday, analyst hiked their fourth-quarter gold forecast by $90 – compared to the end of March – to $1,255 an ounce. They see a drop to $1,215 in the first quarter of 2018, then $1,300 in the second quarter of next year, followed by $1,290 and $1,325 in the next two quarters. All of these forecasts are above the bank’s previous outlooks.
Spot gold was trading around $1,262 as of 9 a.m. EDT.
BNP Paribas economists have changed their outlook on future Fed policy, no longer calling for another rate hike this year. Further, they now look for three more hikes next year, rather than four. In scaling back expectations, BNP Paribas economists cite below-forecast inflation readings and recent rhetoric by Federal Reserve Chair Janet Yellen.
“Much firmer U.S. inflation readings are expected in 2018, feeding off the positive base effect of low readings in 2017,” said the BNP Paribas report, written by Harry Tchilinguirian, commodity strategist. “U.S. real rates stand to substantially decline in 2018, improving gold’s price prospects relative to our previous expectations.”
Analysts also revised their U.S. dollar outlook, saying that while some appreciation is in order, they do not see the currency returning to its 2016 highs.
“Downside macro risks for gold have diminished in the near term,” BNP Paribas said. “But both investor and physical demand do not appear sufficiently strong enough to push gold significantly higher. And with a potential Fed rate hike next March, price weakness may develop by year-end. However by spring 2018, higher inflation will drive U.S. real rates lower and allow gold to rally.”
Meanwhile, analysts said investor demand has been “lackluster” lately despite dollar weakness, pointing out that holdings in exchange-traded funds declined in July. In gold futures, net-long exposure by money managers has rebounded, but still remains below the levels of last September, when gold traded near $1,350.
“The current muted investor interest may be motivated by a macroeconomic narrative that favors emerging markets and European equities,” the report said. “Also, the progressive reduction in the Fed’s balance sheet, potentially starting in September, may not overly impact financial markets.”