Citi Looks For Short-Term Gold Strength, Then Dip Under $1,200

(Kitco News) - Citi Research looks for gold to remain strong for a while before dipping back below $1,200 ounce later in the year, under its “base-case” scenario.

However, in a research report Tuesday, the firm also outlined how the yellow might perform in bullish- and bearish-case scenarios, depending on how global macroeconomic readings and other markets fare.

“In light of the gold price rally since January, we have upgraded our 2016 and 2017 gold-price forecast, highlighting three distinct scenarios,” Citi said.

The bank’s base case, for which it gives a 60% probability, points to gold prices holding current levels into the second quarter as lingering risk aversion supports ongoing gold inflows. Then, better risk appetite in other asset classes, particularly oil, during the second half of the year may send prices back below $1,200.

“Our bull case -- 30% weighting -- looks to a further exacerbation of somewhat elevated U.S. and global growth concerns, perhaps even a global recession, which sends prices above $1,400/oz in 2H,” Citi said. “Our bear case, argues for sub-$1,000 prices in early 2017, though only a remote 10% possibility in our analysis, is based on an outsized rebound in equities, a stronger U.S. dollar/more hawkish Fed and much higher oil prices.”

So far in 2016, negative macroeconomic sentiment and an abatement of U.S. dollar strength prompted the strongest two-month rally in gold since 2011, the bank pointed out.

“Even as correlations between gold, equities and crude remain tight, gold trading has shown a clear bias towards risk-off buying in recent weeks with prices quickly absorbing negative news flows but under-reacting to positive indicators,” Citi said. “Indeed, despite equity and crude prices rallying considerably off their mid-February lows, gold has not seen significant downside, remaining supported at well-above $1,200 ounce.”

Gold’s ability to hold up after a stronger-than-forecast February U.S. jobs report, released on Friday, exemplifies the metal’s strength, Citi said. Meanwhile, exchange-traded-fund inflows have maintained the “feverish pace” set in January, rising 80 tonnes in the last two weeks even as risk sentiment in other markets improved, the bank continued.

Still, Citi’s bias is for improvement in overall market sentiment by year-end, including a rebound in crude oil, other commodities and equities.

“Though not demand driven, our outlook for higher oil prices should have significant positive implications for the global macro outlook and consequently could add more bearish sentiment for gold,” Citi said. “Rising crude prices should improve the economic growth prospects of EM (emerging-market) commodity exporters and soften the impact on these economies of a slowdown in China.”

Citi analysts said they look for central banks to remain gold buyers. World Gold Council data show official-sector purchases rose 25% year-on-year in the fourth quarter to 167 tonnes. Central banks have now been net buyers for eight consecutive years.

“Per our base-case scenario, we do expect further accumulation of central bank buying over the course of the year as an alternate reserve holding, diversifying away from the US dollar,” Citi said.

However, price volatility could mean mixed jewelry demand, Citi said.

Courtesy: Kitco News