Gold trade coming back, if you can wait 2 years: BofA

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Gold will come under further pressure over the course of the year as the Federal Reserve moves closer to lifting rates, but prospects for the precious metal looks far more promising in the next few years, according to Bank of America Merrill Lynch.

"Right now, investors are not in the mood for holding gold because they see the Fed raising rates. So, I think in the next three months you'll see downside risk, $1,100 an ounce is likely," Francisco Blanch, commodities analyst at Bank of America Merrill Lynch told CNBC.

"But if you look out 2-3 years, things are a lot brighter for gold," he said.

Gold kicked off the year with a bang, rising around 8 percent in January. However, the yellow meal has since erased most of its gains as a stronger dollar – driven by rate hike expectations –and gains in equities dim its appeal. Spot gold last traded around the $1,210 level.

Blanch's positive longer-term outlook for gold is driven by two factors.

First, the growing phenomenon of negative-yielding bonds, which makes gold look attractive in comparison.

"There are a growing number of government bonds basically yielding zero or negative. As the number increases, I think a lot of investors are going to wonder why they are holding a liability as opposed to holding an outright asset like gold," he said.

This chart delighting gold bugs

In Switzerland, Germany, Finland and several other European countries, government bonds are trading at negative nominal yields, and as the European Central Bank's quantitative easing program gets underway, yields are expected to fall further.

In the first week of February, some $3.6 trillion of government bonds traded with a negative yield, according to JP Morgan, equivalent to 16 percent of its widely followed Global Government Bond Index.

Another factor that will support gold is the Fed. When the market wakes up to the reality that any increase in rates will be limited, this will help the precious metal, Blanch said.

"It's unlikely we go higher than [75 basis points]. Once we see the market projecting a peak in interest rate hikes then gold is going to become a lot more interesting to the upside in my view," he said.

Blanch was not alone in his optimism for gold in the longer run.

Victor Thianpiriya, commodity strategist at ANZ, also expects the previous metal to break out of its tight trading range two to three years from now.

"Once the Fed hikes are out of the way, we have a base for gold to recover. There's scope for gold to rise to $1,500-$1,600 within the next two years," he said.

Thianpiriya's outlook is driven by his view on dollar. He expects that the greenback's bull market could fade as the euro zone economy gets back on track.

"The ECB's stimulus program runs over another two years. As growth in the euro zone goes back to somewhat normal levels and inflation starts to pick up, that will give the euro a boost [against the dollar]," Thianpiriya said.

The dollar has an inverse relationship with gold. One commonly cited reason for this is a weaker greenback makes gold cheaper for holders of other currencies, supporting demand and prices, and vice versa with a stronger greenback.