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Bank of America Sees a $1,400 Target for Gold

Wayne Duggan

The seven-month slide in gold prices may soon be over. According to a new research note from Bank of America Merrill Lynch, gold prices now at about $1,200 an ounce could be headed $200 higher by the end of the year.

After starting off 2016 red-hot, the price of gold is now down more than 12 percent from its 52-week high above $1,377 an ounce last July. In the last eight months, the SPDR Gold Trust (ticker: GLD) is down 11.4 percent.

Bank of America predicts that investors will be headed back into gold when the market starts to fully appreciate the geopolitical uncertainties ahead.

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"The decline in volatility across asset classes is particularly notable given some of the massive policy shifts currently under debate in the U.S. and Europe," BoA analysts say in the note. "In our view, the market seems to be ignoring the large and growing risks of U.S. or U.K. policy mistakes and the upcoming electoral cycle in Europe."

In the meantime, the strong possibility of aggressive interest rate hikes from the U.S. Federal Reserve this month may continue to weigh on gold. Conventional market wisdom suggests rising interest rates are bearish for gold because higher interest rates lure investors away from commodities and into interest-generating assets. According to the CME Group's FedWatch Tool, the Fed Fund futures market is pricing in a 90.8 percent chance of a 0.75-1.0 percent interest rate increase in March.

Bank of America analysts believe gold will soon be the option of choice for fearful investors. The firm anticipates that gold's "flight to safety" status will trump any potential interest rate headwinds.

"While tighter monetary policy is not bullish, inflation and a range of uncertainties, including European elections and protectionism, should support the yellow metal. As such, we see prices at $1,400 (per troy ounce) by year-end," they say in the note.

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The $1,400-per-ounce price target represents roughly 16.5 percent upside from gold's current spot price.

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