Gold capitulates; further price falls limited to $150
As the price of gold plunged by 14% in two trading sessions, strategists at Bank of America Merrill Lynch lowered their price target
The strategists wrote in a note under the headline 'Gold capitulation' that they lowered their $2,000 an ounce target for the price of the precious metal to $1,838, but said the recent tumble in the markets was exaggerated.
The 14% drop in the price was triggered, in the strategists' view, by fears of central bank gold sales in the eurozone and by poor economic data out of the world's second-largest economy, China, which reported first-quarter growth of 7.7% versus expectations of 8%.
The gold price crash "comes at a time when disinflationary pressures are starting to build in different pockets of the global economy," the Bank of America Merrill Lynch strategists wrote.
"Still, with prices now below $1,500/oz, we expect a pick-up in jewellery demand in the medium term and see immense pain for miners should prices dip below $1,200/oz. As such, we believe the downside to gold prices may be limited to an additional $150/oz," they added.
The gold market selloff, which was in part accelerated by an announcement that Cyprus might sell some of its reserves to reduce its government debt, seemed to discount the combined future gold sales of Portugal and Greece, according to the strategists.
"As we believe additional gold selling in the European periphery is highly unlikely, we find it hard to fully justify the selloff," they said.
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But for a firm recovery in gold prices, a pickup in inflation, monetary easing by the European Central Bank and gold buying by emerging markets for their reserves is needed, and none of these events are likely until the second half of the year, the strategists believe.
They note that futures and options markets, as well as physically-backed exchange-traded funds (ETFs) "have so far remained net long."
"Acknowledging that physically-backed ETFs are often bought by longer-term investors, we believe these market participants have remained involved with gold on a view that medium-term fundamentals remain supported as increasingly affluent emerging markets will boost spending on non-essential items like gold bars and jewellery," they said.
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