(Kitco News) – Gold prices are seeing strong selling pressure Friday and are struggling to hold onto gains for the second consecutive week, and one major U.S. bank sees potential for more weakness in the near term.

In a report published Friday, commodity analysts at Bank of America Merrill Lynch said that significant speculative long positioning in gold futures supports a contrarian view that gold prices, at least in the short term, can move lower. December Comex gold futures last traded at $1,349.10 an ounce, down 0.6% on the day.

“While positioning in futures is no longer as extreme as a few weeks ago, longs still dominate. As such, upside to gold may be limited at present, reinforcing our average 3Q16 forecast at $1,350/oz,” the analysts wrote in the report. “Indeed, the stretched long positions of money managers have raised concerns in recent weeks over where marginal buying that may add another leg to the rally would be coming from.”

However, while speculative positioning and weakening momentum have the biggest impact on prices in the near term, the analysts remain bullish on the yellow metal in the long term. BoAML reaffirmed its view that prices could hit $1,500 an ounce in 2017 because of unprecedented investor demand.

The analysts noted, “Driven by spectacular inflows into physically backed ETFs, annualized investor buying in 1H16 has risen to 2,500t (tonnes), 66% YoY (year-on-year) higher than in FY2015. The importance of these purchases is also apparent in our supply-and-demand model, which suggests that gold could rise to $1,500/oz if full-year investment flows reach around 2,000t.”

The bank noted that the biggest obstacle for the gold market remains the Federal Reserve and potential interest-rate hikes. However, although the bank expects to see a rise in interest rates, it does not expect an aggressive move, which should be supportive for gold.

By Neils Christensen of Kitco News; nchristensen@kitco.com
Follow @Neils_C