Higher bond yields and a stronger U.S. dollar will weigh heavily on gold prices in early 2018, according to analysts at Bank of America Merrill Lynch.
In a report Monday, the bank pared back its expectations for gold in the first quarter of 2018. The analysts now see gold averaging $1,250 an ounce in the first three months of the new year, down from their previous estimate for prices to average $1,400 an ounce.
While the bank sees the first quarter as the low point for the yellow metal, it is not very optimistic through the rest of the year, seeing prices average $1,300 an ounce in the second quarter, down from the previous estimate of $1,350 an ounce. BAML sees gold prices also averaging $1,300 an ounce by the third quarter, down from the previous estimate of $1,400 an ounce.
The analysts said the Federal Reserve’s plan to continue to raise U.S. interest rates in a relatively weak inflationary environment will weigh on gold.
“There is a risk that opportunity costs measured in real terms may increase over the coming months,” the analysts said.
Rising interest rates and bond yields could represent the biggest risks for gold heading into yearend. Bank of America is holding firm that they expect 10-year bond yields will end 2017 at 2.85%, which would represent nearly a 4-year high.
However, this outlook all depends on whether Washington politicians can push forward President Donald Trump’s ambitious tax cuts and proposed reforms.
“Our year-end forecast is highly dependent on the outcome of tax reform. We are more optimistic than consensus in this regard and believe tax reform would boost 10-year term premium by 40-60bp at year end or early 2018. If tax reform were to fail, we would need to revise down our forecasts,” the bank’s interest rate analysts said.
Looking at the U.S. dollar, another major hurdle for gold, the analysts said they see further gains against the euro, which is a major component of the U.S. Dollar Index.
“We continue to expect the USD to strengthen more by end-2017, with potentially much further upside to our projections if tax reform becomes more likely,” the bank’s currency analysts said.
Despite its new bearish sentiment, the bank said it sees a floor in gold at $1,250 an ounce. The bank noted there are a few factors that could drive gold prices higher, including renewed dovishness at the Federal Reserve, a correction in the equity market and ongoing turmoil in U.S. politics.
Reference: Kitco
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