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(Kitco News) - HSBC said Wednesday it looks for gold prices to hit $1,900 an ounce by year-end.
“The Federal Reserve’s third round of asset purchases via quantitative easing (QE3) and other central banks’ policy easing measures are measurably boosting gold-investment demand,” the bank said in an updated forecast. “For investors who expect QE3 will fail to jump-start economic growth, gold offers an attractive quality asset. For investors concerned about the inflationary impact of QE3, gold appeals as an inflation hedge.”
Concerns about U.S. fiscal issues and the likelihood of a weaker U.S. dollar are additional factors supporting gold, the bank said. It also cited continuing central-bank demand that accounted for 456 metric tons in 2011. HSBC said it looks for reserve managers to purchase an additional 450 tons this year and 425 tons next year.
The bank said there are some “sluggish” supply/demand factors, including weak jewelry demand, low Indian bullion imports, rising scrap supply and limited retail coin and small-bar demand. This has the potential to “constrain—but not reverse—the long-running rally,” HSBC said.
The bank lowered its average forecast for full-year 2012 to $1,700 an ounce to reflect price weakness earlier this year. Its previous forecast had been $1,760.
However, HSBC upped its average forecast for 2013 to $1,850 from $1,775, listing a potential range of $1,550 to near $2,000. It also upped its 2014 forecast to $1,775 from $1,750.
“Although the first rush of QE3-inspired gold buying is over, we believe that the Fed’s open-ended commitment to easing until U.S. labor markets improve will support gold well into 2013,” HSBC said.
Gold also may be positively impacted by any further shift in financial markets’ attention away from eurozone debt problems toward similar concerns about U.S. government debt levels and fiscal policies, HSBC said.
“Perhaps the most important plank in our bullish analysis is the likelihood that the U.S. dollar will weaken, as forecast by HSBC foreign-exchange research, due in part to the currency impact of QE3 and U.S. fiscal issues. Other macroeconomic factors, such as persistently high commodity prices, should provide a further prop for gold,” the bank said.
As for supply/demand, HSBC said high prices are encouraging production but this is rising at a “measured” pace, with many wondering why producers are not ramping output even more at a time of high prices. Obstacles include skill shortages, hard-to-access reserves and a resurgence in resource nationalism in a number of mining countries, HSBC said. The bank looks for mine output of 2,870 metric tons in 2012 and 2,960 in 2013, compared to 2,822 last year.
Scrap supply is forecast at 1,740 tons in 2012, up from 1,665 in 2011.
Meanwhile, high gold prices in rupee terms and government policies have crimped Indian gold demand and encouraged greater scrap supply, the bank said. Chinese jewelry demand has been generally robust this year, although it could abate, HSBC said. Also, HSBC said a rally to $1,900 an ounce could hurt jewelry demand further.
Global jewelry demand is forecast at 1,773 tons this year, compared to 1,974 in 2011. HSBC looks for fresh investment demand of 1,572 tons in 2012 after 1,690 a year ago.
By Allen Sykora of Kitco News; asykora@kitco.com