Top forecaster lowers gold price predictions

On Wednesday gold continued to build on gains sparked by disappointing US economic news and a weaker dollar.

Gold futures trading on the Comex market in New York for delivery in December, the most active contract, were exchanging hands at $1,353.70 an ounce, a three week high. Gold is now up some $50 since the release of weaker than expected payroll data on Friday.

Yesterday, the price of gold enjoyed another leg up – the best one day gain since June's Brexit poll surprised markets – when a reading of economic activity from the US Institute for Supply Management fell to its lowest level since February 2010.

We had expected a larger Brexit fallout on financial markets reflected in negative investor sentiment

The weak data poured cold water on expectations of an early rate hike in the world's largest economy. The price of gold tends to move in the opposite direction of the US dollar and also has an inverse relationship to interest rates.

Gold touched a two-year high in July around $1,380 an ounce and year to date the metal is up 27% or nearly $300 an ounce, one of its best annual performances since 1980.

Top forecaster lowers gold price predictions

Source: ABN Amro

Georgette Boele of ABN Amro in a new research note dated September 6 says the last couple of days notwithstanding the gold rally is running out of steam and that gold has underperformed despite the many factors working towards its advantage:

First, we had expected a larger Brexit fallout on financial markets reflected in negative investor sentiment. As a result, investors would move into gold (and to a lesser extent silver) for safe haven reasons. In fact, this did not materialise as investor sentiment on financial markets improved also helped by the recent stronger-than-expected UK data.

Second, our main scenario was that the Fed would remain on hold in 2016. However, recently we moved to a 25bp rate hike in December 2016. Comments from Fed officials and stronger-than-expected US data have triggered expectations that the Fed will hike this year. This has supported the US dollar as US real rates have moved slightly higher (less negative). The rise in the US dollar and US real rates and lower safe have demand have weighed on gold prices in Q3. This is reflected in lower investor demand in the futures markets and for gold ETFs.

Boele was one of the biggest gold bears at the start of the year predicting a fall into triple digits for the gold price and an average below that of 2015. But with headwinds for the US and global economy, unconventional monetary policy extending in developed markets and geopolitical factors burnishing gold's safe haven appeal Boele changed her call in February and accurately forecast the metal's run above the $1,300 an ounce level.

The Dutch bank does not foresee a sell-off in precious metals but a consolidation in gold prices for the coming quarters meaning that gold will likely move in a $1,300 to $1,350 trading range, before moving to $1,400 by this time next year as US interest rates hikes are factored into the price.

In July, Boele examined the performance of gold under different US presidency and concluded that a Trump win in November could see gold reaching as high as $1,850 an ounce. Under a Clinton president gold would also do well, reaching $1,650 in coming years.