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Another decent week for gold and even some of the long–term bears are starting to shift positions.
Deutsche Bank recommended some gold for insurance against market turbulence on Friday.
It had previously been forecasting gold would drop to US$1,000 per ounce by the end of the year, but this target has now been revised to US$1,230.
Research house Capital Economics has consistently been one of the more optimistic commentators on the gold price and today suggested that longer –term the price of the metal is set to rise even higher.
Three effects have been pushing the price higher this year it said.
First, there is a sharp decline in expectations for global interest rates with Japan’s central bank the latest to join the negative rates club.
The weakness in the dollar against other major currencies is the second driver, reflecting the relatively large decline in expectations for US rates, while the third has been a revival of safe-haven demand.
Simona Gambarini, Capital’s precious analyst, acknowledged the 16% rise this year may leave gold vulnerable to profit taking if safe-haven demand wanes and Fed rate hikes return to the agenda.
But over the medium-to-long term other factors such as household and central bank demand and supply dynamics will also have a significant impact on the price of gold.
In particular, supply is starting fall. In 2015, production dropped by 4% having seen a steady 3% yearly increase over the past five years.
ABN Amro notes that while cash costs of the miners have fallen, all-in sustainable cash costs are at higher level and much closer to the current price of gold.
All-in sustainable costs take into account royalties, taxes, overheads and other costs.
“The harsh conditions that miners currently face have triggered a sharp restructuring wave,” ABN said.
“This will, over time, result in lower supply of gold and other precious metals. As a result of lower supply, prices will receive support especially if demand is also picking up.”
Capital also see a revival in jewellery demand on a combination of continued growth in consumption by India and a partial recovery in fabrication in China, after a weak couple of years.
“What’s more, the return of Iran as a large buyer of gold, now that the Western sanctions have been eased, should also support demand.”
Over longer periods it will these other drivers such as falling supply and strong demand from emerging markets households and central banks, that will dominate the price, Gambarina argues.
Her target price this year and US$1,250 per ounce and she sees more upside potential in future years.
On Friday gold for April delivery in New York fell 1.5% to US$1223 an ounce.
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