Gold price bounces back Friday

December 18, 2015

San Francisco (Dec 18)  On Wednesday gold seemed to take the announcement of the first US interest rate hike in nine years on the chin. On Thursday, the metal got slammed. Today, it's bouncing back.

On Friday gold futures with February delivery dates gained 1.5% or $15.70 from yesterday's close to trade at $1,065.00 mid-afternoon in another day of heavy volume on the Comex market in New York. Gold was recovering from its lowest level since October 2009 below $1,050 struck yesterday.

The Federal Reserve's 0.25% hike from  near zero where it's been since December 2008 had been widely expected and the central bank also said given current economic conditions, interest interest rates are only likely to increase in a "gradual" way.

Quiet trading over Christmas and New Year would limit the downside but investors will continue to liquidate positions in the months ahead because of a higher US dollar and higher US rates

Higher interest rates boost the value of the dollar and makes gold less attractive as an investment because the metal is not yield-producing. US Treasury yields and the gold price have a strong negative correlation and a stronger dollar has an even closer inverse relationship to commodity prices in general.

 A new research note by ABN Amro says this relationship will continue to put pressure on the gold price going into 2016.

Georgette Boele, Co-ordinator FX & Precious Metals Strategy at the Dutch bank said while quiet trading over the Christmas and New Year period would limit the downside, "investors will continue to liquidate positions in the months ahead because of a higher US dollar and higher US rates:"

"As a result, new lows in prices could be reached before the end of the first quarter of 2016. We expect gold prices to break below USD 1,000 per ounce in the coming months. Silver prices could drop to USD 13.5 per ounce while platinum and palladium prices could drop below USD 800 per ounce and USD 500 per ounce, respectively."

ABN Amro sees gold at $900 before the end of 2016, before a recovery to above $1,000 by the end of 2017.

The bank is not alone in predicting a triple digit gold price. France's BNP Paribas forecast an average of $975 in 2016 as far back as March, while Deutsche Bank sees the metal eventually retreating to its long-term average in real terms of around $750.

Chief commodity strategist at investment bank Goldman Sachs, Jeffrey Currie, who has been bearish on gold since 2012, has made the call that gold is heading below $1,000 on a number of occasions and in this year's annual gold forecast survey by the London Bullion Market Association, of the 35 analysts polled, five predicted a dip below $1,000 in 2015 already.


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