BofA Merrill Lynch: Gold below $1,000 in 2016

On Tuesday, the gold price continued to drift sideways as bullion traders look for direction ahead of a crucial US Federal Reserve meeting next week.

In afternoon dealings on the Comex market in New York, gold futures with December delivery dates added $0.40 to $1,121.80 an ounce after four straight sessions of declines.

Gold is still well above a more than five-year closing low of $1,084 struck August 5, but the safe haven buying amid the panic on markets did not materialize to the extent many bulls had hoped.

The focus is now squarely back on the the US economy and the prospect of the first interest rate hike in the world's largest economy in more than nine years.

The underlying reason for gold's inverse relationship to interest rates is that the opportunity costs of holding gold increases because the metal is not income producing. Higher rates also boost the value of the dollar which usually move in the opposite direction of the gold price.

The spectre of higher interest rates is the main factor behind a lowering of  Bank of America Merrill Lynch's gold forecast. BofA now believes gold will average $1,122 per ounce in 2015, 6.8% below its previous forecast reports SMM.

A hawkish Fed and tame inflation will see gold fall below $1,000 an ounce  in 2016 says the bank adding that "the combination of higher nominal opportunity costs and lack of inflation has hardly ever been bullish in the past 40 years."

However, as inflation in the US picks up gold should enjoy an  uptrend later in 2016, averaging $1,250 during the fourth quarter of next year.