The second largest bank in America sees further upside potential in the U.S. dollar, but it is also not changing its forecast for gold or silver.
In a report Monday, analysts at Bank of America Merrill Lynch (BAML), reiterated their forecast for gold prices to average the fourth quarter around $1,400 an ounce. At the same time, the bank sees silver prices averaging $17.50 in the final three months of 2018.
The bank said in its report that growing geopolitical tensions, escalating global trade wars and rising inflation pressures will remains supportive of the precious metals.
“We note that the business cycle is maturing and the ongoing uncertainty around trade is not helping at this junction,” the analysts said in their report. “At the same time, inflation has been picking up (shorting Treasuries is one of the most crowded trades), a combination which may ultimately bring gold buyers back into the market.”
The bank’s forecasts come as gold prices pushed to a new 12-months low at the start of a shortened trading week. Silver fell to a fresh seven-month low. August gold futures settled Monday at $1,241.70 an ounce, down 1% on the day; meanwhile, September silver futures settled the session at $15.835 an ounce, down nearly 2% on the day.
The analysts said that the U.S. dollar remains the most significant risk for the precious metals market. The U.S. dollar index is trading near a one-year high, at 95.05 points.
Looking ahead, the analysts said that they see further room for the U.S. dollar to rise against the euro, which has the biggest weighting in the dollar index. BAML sees higher U.S. interest rates driving the U.S. dollar higher through the rest of the year.
“The DXY remains about 8-9% cheap relative to medium-term fair value,” the analysts said. “Fiscal stimulus is driving US growth higher relative to the rest of the world, where growth is sputtering. The market is still priced well below the Fed's projected rate path through 2020, which provides potential for the USD to strengthen on US-specific factors.”
While global trade issues remains a threat, the analysts said that the U.S. economy is in good shape to weather the storm.