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Bank of America Merrill Lynch maintains $1,400 an ounce outlook for Gold

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NEW YORK (Scrap Register): One bank maintained its $1,400-an ounce outlook for gold Monday even as prices cooled on profit-taking, commenting that the precious metal was not yet in overbought territory.

All the mined commodities have rallied through the third quarter and gold has been no exception. Bank of America Merrill Lynch (BAML) believes the yellow metal is on track to hit our $1,400 an ounce target in the coming months.

Gold prices hit a 12-month high on Friday, but have since retreated, with December Comex gold last seen at $1,338.90, down 0.91% on the day.

BAML commented that potential further weakness in the U.S. dollar is likely to add to the metal’s recent uptrend.

“Non-commercial futures positions have pushed higher and z-score suggest that gold is not overbought. Keeping in mind our price model, which estimates fair value gold quotations on U.S. real rates, USD [U.S. dollar], volatility and oil prices, we note that support for the yellow metal has increased,” the report said.

In particular, U.S. dollar moves are likely to underpin gold, according to BAML. The metal tends to move inversely to the U.S. currency.

“U.S. real rates have fallen of late, which is bullish for gold on its own. In addition, this was accompanied by a flattening of the U.S. yield curve, at the same time as the German curve steepened,” the report explained. “The resulting rate convergence helped push USD lower and there are various factors suggesting that the U.S. currency may remain supportive for gold.”

BAML reiterated its view that gold is an effective diversifier, adding that the yellow metal can “save unhedged portfolios” when the U.S. dollar goes through a downtrend. “Indeed, investors could have maximized the info ratio of a USD-denominated portfolio if they had allocated just below 5% of their assets to gold since 2015.”

The physical demand for gold remains somewhat disappointing, the report said, citing soft jewelry demand in China and India. “This suggests that, as usual, investors have been the marginal buyers, with assets under management at physically backed ETFs rising of late,” added BAML.

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