Oil's going to take the shine off of gold: Citi

After a bright start in 2016, aided by a hefty bout of "risk-off" sentiment in global markets, analysts at Citi have played down the possibility of a sustained rally in gold.

The bank predicts that current price momentum for bullion may begin to ease after the current quarter and sees a sustained rally in oil prices having the potential to become more negative for gold later this year.

"Prices could test $1,300 a troy ounce should global growth concerns dominate headlines but our base case gold outlook is for prices to eventually head below $1,200 an ounce (in the second half of the year)," a team of analysts, headed by Edward Morse, said in a quarterly report published Monday but released to the media after a client call on Wednesday.

"We moderate the price outlook into 2017. A sustained oil price recovery could boost sentiment on equities, (emerging market currencies), macro sentiment and possibly cause a reversal in the strong safe-haven bid for gold that has dominated (first half) trading."

Sergio Alexander
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Sergio Alexander

A price plunge in oil since mid-2014 has rocked the investment community with many seeing it as a wider indicator of weak demand and global deflation. Equity markets have been roiled whenever oil sinks lower and this has tended to favor safe havens such as gold.

Spot gold has surged 18 percent so far this year to trade at $1,251.06 an ounce on Wednesday morning. A weak dollar and a more dovish Federal Reserve has also aided the investment case for bullion.

Citi believe there is a 60 percent chance that gold prices will hold at current levels as lingering risk aversion supports gold inflows in the second quarter. However, it added that there's a 30 percent "bull case" that a possible global recession could send prices above $1,400 an ounce in the second half of the year. It also stated there was remote 10 percent possibility that a more hawkish Fed and "significantly higher" oil prices could see gold plunge to the depths of $930 an ounce in 2017.

Silver outshines gold

Meanwhile, gold's fellow precious metal silver has been ticking higher with a sizeable 24 percent gain since the start of the year. Silver hit new highs again Wednesday of $17.255 an ounce, its highest level back to May 22, 2015.

"An improvement in risk appetite and positive data out of China helped create conditions for silver to stage a rally," Joni Teves, a strategist at UBS, said in a note on Wednesday.

Nonetheless, UBS believes that silver - like gold - could see choppy trading for the rest of the year after such a strong performance. Fluctuations would be driven by changes in risk sentiment, wherein silver would struggle to benefit as much from safe haven demand as gold, Teves said.

However, industrial demand for silver should help to drive structural support over the mid-term, according to the Citi analysts

"We expect price drivers to become increasingly industrialized, compensating for tempering investment demand that is due to fall in line with gold weakness in the latter half of the year," the bank said.