Gold and silver are "down but not out," said HSBC Friday, calling for prices to stabilize as jewellery and coin purchases rise.
Nevertheless, following the sharp decline in prices earlier this month, the bank trimmed 10 per cent off of its 2013 forecast, now looking for gold to average $1,542 (U.S.) an ounce. HSBC's average silver-price forecast was trimmed by 20 per cent to $26.
The key drivers for gold, HSBC said, will be investment, retail and central-bank demand.
Investors have been exiting gold exchange traded funds, particularly as equities rose this year.
"If the economy is moving towards some level of normalization and faith in paper assets continues to improve, then we could see further outflows," HSBC said. "That said, we believe the bulk of liquidation has already occurred and that a large component of the market still has a 'buy and hold' trading strategy. Similarly, a renewed period of risk aversion, uncertainty, or inflation could result in a renewed wave of ETF buying, supporting the gold price."
Retail demand for gold "is the main reason we expect prices to stabilize and move slowly higher," HSBC said. "Lower prices attract greater buying, especially in India and China."
In fact, the bank said, a 15 per cent rise in physical purchases in India and China would increase gold consumption by 250 tons this year, a little less than total gold exchange traded fund liquidation so far in 2013. U.S. coin sales have also been robust.
HSBC also looks for central banks to remain buyers, forecasting 450 tons of purchases this year.
"The recent drop in price should not dissuade central banks from what appears to be a long-term policy of gold accumulation," HSBC said. "They are less concerned about potential price appreciation and are more attracted to bullion, principally as a means to diversify away from the U.S. dollar and as an overall strategy of portfolio diversification. Thus, U.S. dollar-laden central banks, particularly in the emerging world, should continue to accumulate more gold this year and next, regardless of the recent sell-off."
Meanwhile, HSBC said, gross short speculative positions on the Comex division of the New York Mercantile Exchange remain historically elevated, although down from the highs for the year. "This leaves open the possibility of a short-covering rally, which could be particularly acute should there be a change in investor sentiment."