(Kitco News) - Gold prices have managed to hold their ground in the face of surging bond yields and rising interest rate expectations, but one bank expects the current headwinds will eventually prove to be too much for the precious metal.
For the last two years, commodity analysts at Bank of America have been some of the most bullish in the marketplace. They were among the first to call for $5,000 an ounce; however, their bullish conviction is waning as rising energy prices continue to fuel inflation fears.
In the bank’s latest precious metals outlook, analysts said they are maintaining their bullish 2027 forecast, but added that their outlook is not without risks.
“If oil spiked to $150/bbl as a result of extended Middle East tensions, which is not our base case, we estimate gold would average $3,500/oz in 2027. Thus, the Iran war remains the key headwind,” the analysts said.
Meanwhile, the bank said it sees gold prices falling to $3,750 an ounce in the fourth quarter as energy prices remain elevated. The analysts said current market positioning poses the biggest risk for gold in the current environment of elevated uncertainty.
“While prices are under pressure, investors and traders have so far looked through some of the near-term headwinds, with many expecting prices to rise again further down the line. We believe that this is a rather fragile equilibrium in sentiment. As such, if there is no resolution to the conflict in the Middle East, a rapid unwind of positioning could pressure gold lower relatively quickly,” the analysts said.
Since the start of the year, BofA has said that higher gold prices depend on renewed investment demand. In January, the bank said investment demand would have to rise by 14% for prices to hold around $5,000 an ounce.
Although investment demand has picked up and remains resilient, BofA said this demand still only supports prices around $4,000 an ounce.
“Investor demand would need to accelerate to take gold prices closer to $5,000/oz and, given the Iran war, this looks unrealistic for now,” the analysts said.
BofA also noted that the Iran war poses another risk to gold beyond inflation fears. The analysts explained that there is a risk that higher energy prices could force central banks to sell their gold to support their economies and currencies, similar to what happened at the start of the Iran war. Central banks, led by Turkey, sold about 60 tonnes of gold during the second quarter.
“Central banks turned net sellers in March, when rising oil prices put pressure on currencies and current accounts of energy-importing nations,” BofA said. “There is the risk of a repeat now, which may well exacerbate any headwinds should retail investors start liquidating ETFs.”
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