Gold hits 3-week highs as RBC Capital raises forecast by 9%

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Perhaps it was the Federal Reserves downgrade of first-quarter GDP to an anemic 0.1%. Or maybe it was news that Fed chief Janet Yellen was holding an unscheduled meeting with President Barack Obama. Or maybe it was investor jitters ahead of the most pessimistic corporate earnings season in years.

Whatever the driver, gold rose to its highest level in about three weeks Monday, nearly touching $1,260, while silver also surged, making a run toward the psychologically key $16 level.

Certainly, fading expectations of a hawkish Fed have helped keep gold buoyed. No one is expecting rates to return to historical norms anytime soon. Former Fed chief Ben Bernanke himself just published a blog post advocating the logic of helicopter money as a potential stimulative tool. Meanwhile, the International Monetary Fund came out once again in support of negative interest rates, and its expected to downgrade its forecasts for global growth this Tuesday.

Add to these drivers the fact that a widely watched Fear Barometer produced by Credit Suisse just hit a new high, and its no wonder that RBC Capital has joined the ranks of firms now upgrading gold-price targets for the coming months.

Thank partly to expectations of just a single Fed rate hike this year, RBC has lifted its 2016 average gold price by a whopping 9%, to $1,250 up from $1,150. Likewise, its 2017 average price has now increased by 8%, from $1,200 to $1,300. Its longer-term target also rose by 4% to $1,300, up from $1,250.

And although its silver target for 2016 is unchanged, its 2017 price is now $16.50, while its 2018 forecast now calls for $17.50.

A more dovish posture from the Fed, declining real rates and improving fundamental demand for physical gold have lead to our more positive outlook for gold, RBC analysts wrote. For the balance of 2016 we expect gold to trade in a broad $1,200/oz. to $1,300/oz. range with the gold price improving over the course of the year. There are a number of positive demand catalysts, including steady fundamental demand from China and India, systematic central bank purchases, and U.S. inflows into the physical gold ETFs. This later trend is reminiscent of the fundamental investment demand observed from 2005 to 2007.