BofA: Brace for gold ‘singularity’ if Fed doesn’t tighten

The gold price suffered another down day on Tuesday as large investors reduce long positions built up in the market in the run up to the metal’s January 22 high of just under $1,308 an ounce.

Net long positions – bets that the price would go up – held by hedge funds and other so-called “managed money” speculators climbed by 10 million ounces in January, reaching the highest level since December 2012.

But the apparent averting of a single currency crisis sparked by the Greek election provided the opportunity to liquidate some of the bullish positions and shift focus back to US economic fundamentals, the rampant dollar and a likely June rise in interest rates.

At $1,260 an ounce late on Tuesday, the metal is still trading up some $80 or 6.4% in 2015, but the strong upwards momentum was broken last week Thursday when the price plunged $35 during the worst trading session in more than a year.

Gold weakness this week also came despite another day of gains for crude oil, which jumped to a day high of $54.24, the best level this year.

Platts News quotes from a new research note by Bank of America/Merrill Lynch on Tuesday that says gold has “decoupled” from its century-old relationship with oil and is now being driven by interest rates and currencies.

“Moreover, we think that a unique combination of factors is again making gold attractive in investor portfolios: negative nominal interest rates, a closing volatility gap to other asset classes, and improving weekly returns. After all, unlike government bonds or fiat currency, gold is no one’s liability,” said BoA/ML analyst Michael Widmer.

Widmer predicts the gold price to reach $1,400 by 2017 – while the first Fed interest rate hike is nearing “other central banks will likely continue to print new money and charge investors to park their old money”:

“True, the strong dollar will likely remain a drag on gold for now. But if the Fed fails to hike as advertised, cross-asset volatility will rise. Brace then for gold singularity.”

A new survey by the London Bullion Market Association of 35 analysts, indicated gold will trade in a narrow band this year to average $1,211 a troy ounce with a range between $1,085 and $1,356 during 2015.