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Does Citigroup See Brightness in the Gold Market?

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Three possible scenarios

Further to its outlook on gold, Citibank is analyzing potential rate hikes by the Federal Reserve over a period of time to get clues on gold’s direction. The fluctuations in the US dollar are also being considered in the bank’s study of gold prices.

In the bank’s research report, it has listed three possible scenarios:

  1. In its “base-case” scenario, the bank points out a 65% chance that gold’s price will be $1,325 per ounce in 3Q16 and $1,280 in 4Q16. It has considered only one rate hike before the year’s end. The weakness of the dollar and the restoration of depressed Asian demand could also provide a helping hand to gold.
  2. In another case, there is a 25% chance that gold will turn bullish and trades at $1,400 in 3Q16 and $1,425 in 4Q16. This would happen if global concerns were to elevate and a rate hike were distant.
  3. A 10% chance of a “bear-case” scenario, in which equities could outperform as global concerns fade. The stronger dollar could weigh precious metals, and the Fed could turn hawkish. Gold could trade at $1,075 in 3Q16 and $1,000 in 4Q16.
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Global unrest

Amid the current turmoil in the markets, the chances of economic outperformance are bleak, and the risk of recession is overpowering, providing a stronger bull case for gold. Even the Fed’s members look more dovish than hawkish, boosting gold and gold-based funds such as the iShares Gold Trust ETF (IAU). This fund has risen by ~24% so far in the current year.

Haven bids have also significantly helped silver-based funds such as the Physical Silver Shares ETF (SIVR). This fund has risen by ~41% year-to-date. Citibank is looking for silver prices to average $18.3 in 3Q16.

Let’s look at another major bank’s view on gold.

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