Gold prices to rise further on Fed’s dovish outlook and European uncertainties, analysts say

prices have seen a rebound after the U.S. Federal Reserve raised its benchmark rate by 25 basis points last week. Since then, the weakness in the dollar has led to further strength in gold prices.

The precious metal hit a two-week high on Monday as the plunged to a 6-week low after the Fed's dovish outlook on the pace of rate increases this year continued to disappoint dollar bulls. But a number of analysts believe that gold will continue to rise further.

Nitesh Shah, director, economist and commodity strategist at ETF Securities, told CNBC via email that he expects gold prices to rise to US$1300 an ounce by mid-year.

"We expect gold to rise to US$1300/oz by mid-year (over 5% gain), before declining back to current levels by year-end. A dovish Fed will be met by inflation surprises over the coming quarter, which will lead to further decline in real interest rates," Shah said, adding that given gold's inverse relationship to real rates, prices will rise over the coming months.

Dario Pignatelli | Bloomberg | Getty Images

"Although we agree with consensus that the Fed will deliver only two further rate hikes this year, Fed members may be forced to talk tougher in the second half of the year, which could tighten yields and lead to a stronger US dollar. For now a dovish Fed is likely to support gold."

Gold is down more than 4 percent since the day of the U.S. election but the precious metal has managed to pare losses and is up nearly 7 percent since the start of the year. Gold is highly sensitive to rising U.S. interest rates because they increase the opportunity cost of holding non-yielding bullion while boosting the dollar, in which it is priced.

In a research note, Swiss investment bank UBS said sentiment towards gold so far this year has been broadly positive yet fragile. The note further says that many investors have been caught off guard by gold's resilience over the past couple of weeks and part of this resilience is because of the lingering political uncertainty in Europe.

Customer tries on a gold necklace in New Delhi.
Raj K Raj | Hindustan Times | Getty Images

The focus will also shift to India and China, the two biggest markets for gold and with February trade flows from India looking quite encouraging, UBS thinks the focus will move to physical markets.

"Some of the focus is likely going to shift towards physical markets. Gold is nearly 4 percent cheaper since the start of the month and with recent performance suggesting decent support around $1200, it will be interesting to see if physical buyers would come in around these relatively lower levels," UBS said in a note.

Recently, Bank of America Merrill Lynch predicted gold prices to jump $200 by the end of the year.

"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," the bank said.

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