Merrill Lynch has added its voice to the chorus of gold bulls who have been predicting that bullion will hit $2000 an ounce.
Francisco Blanch, Head of Global Commodity & Multi-Asset Strategy Research at the investment bank, says he expects the Federal Reserveto initiate an asset-purchasing program of as much as $500 billion in the second half of the year, which will drive spot gold much higher by the end of the year.
"We think that $2,000 an ounce is sort of the right number,” Blanch said on CNBC Asia’s “Squawk Box” on Thursday. “We believe that ultimately the Fed will be forced to do quantitative easing . If it happens in September, as our economists expect, we will get a rally sooner in gold. If it happens after the election (in November), we will get the rally a little bit later; probably we will touch $2000 an ounce sometime next year.”
Spot gold was trading almost unchanged at $1,569.71 an ounce by 6.14pm GMT on Wednesday and inched up to about $1,572.80 in early Asian trade on Thursday. The metal has fallen nearly 20 percent since touching an all-time high of $1,918 in September last year, as a combination of Europe’s debt crisis and concerns over global economic growth triggered a selloff in risk assets like commodities.
Despite this decline, market watchers from prominent investor Jim Rogers to hedge fund manager Eric Sprott have continued to stay bullish on gold, believing that central banks around the world will continue their policy of monetary easing and investors will seek out the metal as an inflation hedge.
Traders are expecting the Fed to embark on a third-round of bond purchases to stimulate the U.S. economy on concerns that the recession in Europe and the slowdown in China could worsen. Yield on benchmark 10-year Treasurynotes ticked down to 1.517 percent, and the 30-year note was also marginally lower at 2.614 percent as investors sought refuge in the safe-haven asset.
Axel Merk, President and Chief Investment Officer of Merk Investments, says it is almost certain that the U.S. policymakers will ease monetary policy, maybe as early as next week when Fed chief Ben Bernanke delivers the central bank's updated economic assessment to Congress.
Merk said Bernanke is a believer in using a weaker currency to boost a nation’s competitiveness and get out of a recession, and will therefore use monetary policy as a tool to spur a U.S. economic recovery.
“He did say that going off the gold standard during the Great Depression helped the U.S. recover from the Great Depression faster than other countries, meaning that debasing your currency is helpful,” Merk told CNBC Asia’s “Squawk Box”. “That’s what he is trying to do.”
Some traders are not as bullish on gold. Andrew Su, CEO of Sydney-based commodities trading and advisory firm Compass Global Markets, said he expects gold to decline over the next few months and that it could fall to as low as $1,300. This is because investors will be liquidating gold, which has made them money in the past year, and trying to prop up losses in equities.
“I also believe that the chances of quantitative easing this year from the Fed are much lower than market expectations and we will see a sustained rally in the US dollar,” he said. “I believe we will see an accelerated fall below technical support at $1,530 in the short term to see prices fall to settle around $1,300.”
- By CNBC's Jean Chua.