Gold to recover and top $1,200 by years end, bullish GFMS predicts

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Add precious-metals analytical firm GFMS to the list of forecasters who are predicting a potential rebound in gold prices in 2016.

The firm, owned by Thomson Reuters, just published the fourth-quarter update to its widely followed Gold Survey 2015 analysis.

In 2016 GFMS sees gold prices, currently near $1,100 an ounce, recovering to above $1,200 an ounce by year-end, and averaging $1,164 an ounce in the full year, its parent news agency reported. Gold demand is expected to grow by 5% this year.

Second half of 2016 could shine: Earlier this year, in a bullish analysis, GFMS argued that gold mining supply likely peaked in 2015 and would fall 3% in 2016. Golds picture also could brighten based on Chinese demand as well as sinking expectations about the pace of the Federal Reserves rate-hiking program, the firm wrote in its new update.

While gold is likely to remain under pressure for some time, the prospects look brighter for 2016, particularly in H2, GFMS argued, predicting a rebound in pent-up demand from Asia and a further contraction in global mine production.

Slowing Chinese growth and the negative outlook for the yuan should benefit gold in the medium term, and once there are clear signs of a price recovery, or at least a stabilization, we should see investors coming back into the market, it said.

Fewer Fed rate hikes are likely: Moreover, the market has been arguably pricing in four U.S. rate rises this year. However, given a weak economic recovery and highly accommodating stance of monetary policies outside the United States, we are likely to see only two small rises. This should again strengthen market sentiment, the firm wrote.

We expect a slow recovery in 2016 in dollar terms, with the gold price trading above $1,200/oz towards year-end, and averaging $1,164/oz.

The report noted continuing increases in Chinas official-sector gold holdings, as well as purchases by other banks on the mainland.

Moreover, demand for gold bars rebounded in the second half of 2015, especially in the final quarter.

Weaker yuan to boost gold demand: GFMS also argued that the Chinese yuan, or renminbi, currency likely will be weakened further by authorities in order to steer the economy out of its current slowdown.

There remains a common view in the Chinese market that it is very likely that the yuan will continue to depreciate over the course of 2016. Once it becomes clear that the yuan is on a depreciating trend, Chinese people are likely to start buying more physical gold to preserve their wealth. This move should benefit the gold price in RMB terms, and further widen the spread between the local and the dollar gold price. Indeed, with increasing demand from both the official and retail sectors ahead of the spring festival, a transient, but solid recovery in the Chinese demand should be ensured at least until the end of the first quarter of this year.

Indias 4Q demand explodes: Meanwhile, the worlds other major gold consumer, India, hasn’t lost its appetite for the yellow metal. Jewelry consumption in India increased 14% year-on-year to 203.7 tonnes in Q4 2015, the highest since Q3 2008 and the highest fourth-quarter demand on record. Meanwhile retail investment increased by 18% year-on-year to 52.2 tonnes, the highest since Q4 2013. Festive and wedding-related demand helped buoy consumption.

Gross official imports into the country in Q4 2015 were 246.6 tonnes, 16% lower year-on-year. Annual imports were 904.5 tonnes, 10% higher than 2014.

By GFMSs accounting, India in fact remains the worlds largest gold buyer, retaining that crown for the second straight year thanks to record high jewelry consumption at 703 tonnes.

Next resistance level is $1,140: The firm sees the $1,040 level as a key support level for gold and praised the metals resilience. The next level to the upside is the lowered ceiling at around $1,140/oz and beyond that $1,180-$1,200/oz zone.

The U.S. dollar remains a headwind for gold, but the firm thinks the top could be in for the greenback, noting that it will be quite challenging to break the 102 level for the dollar index. In addition, the recent breach above 100 arguably reflected a more favorable global economic environment. However, that strong sentiment has waned and driven by continued weakness in the equity markets, gold could find some strength during the rest of this year, which would indicate a bottom has been formed.

Overall, GFMS has issued a relatively positive outlook for gold prices, giving further reasons for a rebound as 2016 progresses.