In April, Bank of America become one of the several large investment banks which revised their gold and silver price forecasts for 2013 and 2014. At the same time, the bank highlighted the lack of investment buying and hinted that gold could push down to $1,200 an ounce in the coming weeks.
On Wednesday, gold futures rose, buoyed by strength in the euro as some investors took advantage of a pullback in prices in the previous session. Gold for August delivery rose $8.40, or 0.6%, to $1,388.10 an ounce on the Comex division of the New York Mercantile Exchange. July silver was also higher, up 16 cents, or 0.7%, at $22.36 an ounce.
However, BofA’s outlook on precious metals was further revised during the past week and now analysts see gold to average $1,478 an ounce this year, 12% below previous expectations. This estimates are very similar to the projections of other big investment bankers.
In addition, analysts believe that the fundamental backdrop for silver remains weak. While spikes on the back of technical short-covering are possible, silver looks set to average $24.4 an ounce in 2013, 25% less than the previous forecast, and could fall below $20 an ounce in the coming months.
Macro may not prompt immediate return of investors
Investors have been the marginal buyers of gold and silver prices in recent years. Ongoing headwinds to fundamentals of these two metals are heavily influenced by the lack of bullish macro economic drivers. Put differently, post recession, noncommercial market participants initially increased their exposure to precious metals on views that expansive monetary policies would cause inflation. There were also concerns that especially the US Federal Reserve is debasing USD. Yet, given output gaps and the business cycle stage, the global economy has structurally and cyclically shown pockets of disinflation. Also, USD has tended to appreciate against currencies like EUR of late. A change in either of these headwinds does not look imminent.
Pockets of demand strength to prevent complete meltdown
Despite the rather gloomy picture, it is worth noting that some demand strength persists, which may ultimately prevent a complete meltdown in gold and silver prices. To pick just two indicators, CME gold inventories have fallen partially because traders have removed metal, refined and then shipped to countries with healthier physical markets like the Middle East.
Meanwhile, sales of US Silver Eagle coins, which are often picked up by retail buyers, have been running at a record pace seasonally. Of course, it is also worth noting that shorts have increased meaningfully, raising the risk of short technical spikes.
The gold rally is pausing, but it is not broken
In BofA’s view, the gold bull market is pausing. However, the structural rally is not broken, and there are several scenarios that could push prices higher again. To pick just one, more affluent emerging markets could increase metal purchases to an extent that gold could trade at $2,000 an ounce, even if investors bought only a third of the gold they purchased in 2012.
The importance of investors as marginal buyers could subside gradually. This trend is heavily influenced by rising affluence in emerging markets, which should result in more spending on luxury goods like jewelry. In fact, we estimate that jewelry demand may become so pronounced by 2016 that prices could trade above $1,5000 an ounce even if investors were net sellers. Looking at sensitivities from a different angle, we estimate investors would need to buy merely 600t of gold to sustain prices at $2,000 ounce by 2016, compared to non-commercial purchases of 1,798t in 2012.
For gold to average $2000 an ounce, investors would need to buy more gold this year than in 2012 for gold to average $2,000 ounce. Given the macroeconomic environment and the significant selling through the past months, this is highly unlikely.
To sustain prices at $1,500 an ounce, speculative gold purchases could decline somewhat YoY. Still, the buying implied by our model looks very high, considering recent events. As a result, gold price could be ranging between $1,000 an ounce and $1,500 an ounce in the coming weeks. Assuming that some of the immediate investor selling may start to subside, but the lack of buying interest persists, there is scope for gold prices to fall to around $1,200 an ounce in the near term.
