BANGALORE Disappointing economic data and faster-than-expected credit rating downgrade of the U.S. government could lift gold prices to $2,000 an ounce, Bank of America Merrill Lynch said on Wednesday.
The downgrade will further fuel an environment of low growth, low interest rates, and high liquidity that will set conditions for gold price to rally.
"It will probably increase the pressure on EM Central Banks to diversify their international reserves out of the U.S. dollars and into gold," BofA said in a research note.
The debt downgrade has made the world a riskier place, enhancing gold's status as the ultimate safe haven asset, the bank added.
The bank raised its 12-month gold price forecast to $2,000 an ounce, citing a 40 percent chance of a third round of quantitative easing (QE3) in the United States in the next 12 months.
"With inflation expectations anchored by high energy prices, real interest rates should remain low and provide support to gold prices going forward," BofA said.
The bank remained bullish on oil, as it believes global oil markets are still heavily undersupplied relative to the expected pace of economic growth.
It still forecasts Brent crude oil prices to average $114 a barrel in 2012.
"As the global economy slows down in the next few months, we still believe Brent should average $102/bbl in 4Q11, and briefly touch $95/bbl," it added.
In a recession scenario, Brent could break below $80/bbl, only to regain its level when OPEC turns the taps off, the bank said.
Brent rose by more than $4 above $106 a barrel in European trading hours on Wednesday, extending gains after a pledge from the United States's Federal Reserve to keep interest rates low for the next two years brought investors back into dollar-denominated risky assets.
Downside risks will grow in the short-run for industrial metals such as copper, with prices dropping to $8,000 a tonne in the second half of the year.
However, the bank kept its 2012 average copper forecast at $10,175 a tonne, adding, "Any drop in commodity prices should be short-lived."
With gold poised to move higher in anticipation of likely monetary and fiscal policy responses, the pullback in commodities should be short-lived, the bank said.
BofA Merrill is one of the biggest commodities traders among
investment banks. As a swap dealer, it provides hedging services to industrial commodity consumers and producing companies.
(Reporting by Soma Das in Bangalore; Editing by Ramthan Hussain)