Gold has been fairly “flat” so far this year in terms of the euro, but that’s far better than gold’s 10% decline in dollar terms. Gold began the year at about 970 euros per Troy ounce, and that’s where it stands today. Maybe that’s why European banks tend to be more positive on gold’s outlook than U.S. banks.
Specifically, Germany’s Commerzbank sees gold gaining ground in 2016, even if the Fed raises rates three times: “We expect to see prices perform better in the new year once the Fed has implemented its first rate hike in mid-December, thereby dispensing with one key factor that has been weighing on prices this year.” Commerzbank thinks that “robust demand from Asia” will push gold to “$1,200 per troy ounce by the end of 2016. Silver should likewise make gains in gold’s slipstream, especially since rising physical demand will meet with falling supply.” Even if the Fed raises rates three or four times in the next year, they see gold rising: “During the last cycle of rate hikes, the gold price was able to gain 11% within one year following the first rate hike, despite the subsequent series of rate increases.” They are referring to 2004 to 2006, when the Fed raised rates 17 times by 0.25% each time, raising rates from 1% to 5.25%.
“Because far fewer rate hikes are expected this time,” they said, “the gold price should be able to make similarly strong gains in 2016, even if the U.S. dollar appreciates further, unlike last time.” No matter what happens to the dollar, they believe that the main driver of gold prices will be Chinese demand, and a pickup in Indian demand. They also forecast that central banks will continue to buy gold. They see gold rising even faster in 2016 in euro terms. Since the European Central Bank is cutting rates while the Fed is raising rates, Commerzbank thinks the gold price in euros is likely to rise more than gold in U.S. dollars. Commerzbank said it sees gold at 1,165 euros by the end of 2016, up about 20% from 970 euros today.
Switzerland’s UBS Bank is not as bullish as Commerzbank, but they predict that the chances of a short-covering rally in gold is now greater (“elevated”). As we said last week, there is a large group of bearish speculators who sold gold short, expecting the price to fall further. If gold begins to rise strongly, these “shorts” must buy back the gold they already sold. This “short covering” can be a very bullish situation.
UBS says that the number of shorts suggests that the gold market has been expecting a gold price collapse after this week’s presumed Fed rate hike. Meanwhile, “net speculative longs are currently at the lowest in 14 years.” The most recent Commodity Futures Trading Commission data show gross shorts within 7% of a record high, so they concluded: “Extreme short positioning suggests that the risk of a more dramatic short-covering rally is currently elevated, particularly if a rate hike is accompanied by dovish rhetoric.”
England’s Sharps Pixley also predicts a recovery for gold in 2016. The London-based metals firm sees “gold leading the way and commodities following thereafter,” They think that gold’s bottom, if not already set, is “not far off and once that is reached – and more importantly perceived to be reached – it should be set to rise sharply. In any case we do see the downside from now on to be decidedly limited.”
Of course, America’s Goldman Sachs and Bank of America are still negative on gold, and they will probably remain that way until gold reaches $1200 or more. Goldman Sachs says “we maintain our $1,000 per ounce gold price forecast over the next 12 months.” Bank of America Merrill Lynch says “there are still good reasons to be bearish on gold, at least in the first half of the year.” They see a drop to $950 gold in the first quarter, with perhaps a recovery coming later in the year to $1,250 per ounce.