(Kitco News) - Barring a major geopolitical event to push gold prices higher, the market is destined to fall below $1,200 an ounce, says one market economist.
According to KC Chang, senior economist with IHS, the biggest event on the horizon that is currently supporting prices is Britain’s upcoming referendum, June 23, on whether or not the nation will leave the European Union. A “Brexit” could be the game changer that pushes prices above $1,300 an ounce, he said.
In a recent research report, the firm said there is about a 35% to 40% chance. Which Chang said has been enough to keep gold prices elevated in the near-term. However, as the referendum is expected to eventually fail, Chang added stability will enter the marketplace, reducing the need for safe-haven assets like gold.
Wednesday, June Comex gold futures were relatively unchanged on the day, trading at $1,254.70 an ounce.
“What drove gold up in the first quarter was more sentiment then actually looking at the economic data,” he said. “If you look at the data, in the U.S., it’s not that bad. It’s not as strong as some people were expecting but it’s good enough.”
Chang said that he is expecting the desire to hold gold, which drove prices to a 13-month high in the first quarter and lead to the best quarterly performance in 30 years, to dissipate as the summers begins, ahead of the next major Federal Reserve meeting in June.
Although some of the economic data has been disappointing, Chang said that the labor market continues to show momentum, which will be enough to convince the U.S. central bank to hike rates again. This is a fairly aggressive forecast as CME Group’s 30-day Fed Fund futures are only pricing in a 16% chance that the Fed raises rates.
While Chang is still bearish on gold for 2016, he added that he doesn’t see prices falling back to the December lows. He said that he could see prices trading in a range between $1,100 and $1,200.
“I think we have reached the bottom in gold,” he said. “There is definitely more upside support for gold but right now, the picture is for prices to fall back in the latter half of the year as the geopolitical risks dissipate,” he said.
One of the factors that will help support gold prices is the fact that prices are already near production costs.
“Look at global average production costs are around $900 a troy ounce. With prices between $1,100 and $1,200, we are near the bottom. If prices fall any further then you are going to see gold miners have to shut and reassess their operations again,” he said.
Supply is already expected to fall this year compared to historical averages, as a result of previous closures and production cuts in the industry, which should also help support gold prices.
By Neils Christensen of Kitco News; nchristensen@kitco.com
