(Kitco News) – Despite an optimistic outlook for gold this year, one UK-based research firm recently downgraded its forecast for gold prices.
In an earlier interview with Kitco News, Capital Economics said it expected gold prices to end 2016 at around $1,400 an ounce. However, in its official 2016 outlook report, released Tuesday, the firm’s commodities economist, Julian Jessop, said he expects prices to hit $1,250/oz by year end.
“We expect further Fed tightening and renewed dollar strength to continue to weigh on the price of gold over the next year or so,” he said. “However, this would still be comfortably above the current level of $1,078 and the latest analyst consensus for the end of the year of around $1,100,” he added.
Gold futures have started the new year on a stronger footing, getting ready for a second consecutive positive close. Comex February gold futures were last quoted up $4 at $1,079.20 an ounce. 
According to Jessop, it is hard to be too bullish on gold prices as the firm expects the Federal Reserve to continue tightening its monetary policy. Earlier this year, the Fed raised interest rates by 25 basis points, the first increase in nearly a decade.
“[T]he Fed is likely to raise interest rates by more than the markets expect over the next year or so, and the US currency will strengthen further against the euro and yen,” he said.
Jessop noted that gold prices may face a severe test later in the week as markets await Friday’s nonfarm payrolls report for December, which may push the U.S. dollar higher and weigh on the yellow metal, if the data turns out to be positive.
However, there still remains bullish factors for gold over the medium term, including safe-haven demand and higher demand from emerging economies, Jessop noted.
Another factor to help gold prices, according to Jessop, is his outlook for inflation, especially in the U.S.
“This should keep real interest rates low and refresh the appetite for inflation hedges,” he explained.
By Sarah Benali of Kitco News; sbenali@kitco.com
Follow me on Twitter @SdBenali
