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Gold Will Retain Gains Through H1 2018 - BNP Paribas

(Kitco News) - Gold will be keeping January’s gains throughout the first half of 2018, according to BNP Paribas, but will face downward pressure in the second part of the year as the Federal Reserve proceeds with normalization of monetary policy.

“Rising inflation expectations and a weak dollar, as long as they last, provide the support for gold’s current trading levels,” Harry Tchilinguirian, senior commodity strategist at BNP Paribas, said in the Precious Metals Market Comment published on Friday.

“Our gold (period average) forecast for 2018 is revised slightly higher at USD 1315/oz (+USD 60/oz). We initiate a first view for 2019 with a period average of USD 1170/oz,” Tchilinguirian wrote.

Gold prices have been benefitting from a weaker U.S. dollar despite three rate increases in 2017 and firm expectations of more rate hikes in 2018.

“With upward revisions to the economic and inflation outlooks in the US and the eurozone, investor interest in gold will likely remain in place,” the note added.

Also, gold received a boost this year as investors chose the metal as a hedge against surging equity markets, Tchilinguirian said.



But, in the second part of the year, inflation is looking to “moderate” and real yields are expected to rise, which will increase the opportunity cost of owning gold.

“The Fed will continue to plot a steady course in normalizing rate policy in 2018. On the back of the latest FOMC significantly upgrading language around economic outlook, we now see four rate hikes in 2018 and one more in 2019,” Tchilinguirian wrote. “With base-effects keeping inflation readings at bay, the longer term direction of monetary policy would in turn suggest greater downside risk to gold prices.”

BNP Paribas said that upside is limited for gold, but also pointed out that downside risks are unlikely until “bond yields push much higher in H2 2018.”

Tchilinguirian recommendation is “a short strangle position on Jun’18 gold through the simultaneous sale of a USD 1,425/oz call and a USD 1,250/oz put for a premium of USD 13.20/oz.”

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