‘The price of gold will reach 1480 dollars’

Despite the current market consensus that the period of rising gold prices has ended, the key argument in favor of gold is stronger than ever, according to the latest report from Erste Group ‘We rely on gold’.

-At this moment in financial history, there are no reference points, as never before have such extensive experiments in monetary policy been undertaken globally, and if there has ever been a need for monetary insurance in the form of gold, it is undoubtedly now. We expect central banks to continue with the expansionary trend that will, without a doubt, lead to an increase in the price of gold- 

Hans Engel, an analyst at Erste Group for foreign equity markets, says:

 -In general, we expect that the fundamentals in favor of gold will receive more attention in the coming quarters and that the price of gold will recover from current levels. However, some time is needed for the expected price recovery- states the analysis.

Despite the recent technical damage that the price of gold has suffered, its growth is expected under the influence of expansionary monetary policies; the 12-month target price for gold is 1,480 USD.
Unlike the situation seen in 1979/80, the current rise in gold prices will not end due to a sharp rise in interest rates, as the balances of states, households, and companies are burdened with enormous debt. In the current circumstances, this would lead to a depression caused by deflation. According to data from the Bank for International Settlements (BIS), the total debt of states, households, and non-financial companies in the 18 most important OECD member countries has grown from 160% of GDP in 1980 to 340% of GDP in 2012. To continue fighting against ongoing problems in both the financial and real sectors, the central banks of the USA, Japan, and the United Kingdom, as well as the European Central Bank (ECB), will continue to keep interest rates at low levels. 

-Since 2008, interest rates have been cut worldwide more than 500 times. We have never witnessed such a low level of interest rates globally. Interest rates in many countries are at record lows. Due to the level of debt that has been reached in the meantime, real interest rates have nowhere to go but into negative territory, thus remaining low. There has always been a strong correlation between negative real interest rates and the price of gold, which means that current circumstances create an ideal foundation for price growth – it is emphasized in the report.

Gold trading is currently of reduced intensity after the price drop, but market positioning signals an upcoming bottom after which a period of growth will follow.

During the recent decline, the market once again showed its tendency to maximize losses. The price drop that occurred in several waves, starting in mid-April, had more than five standard deviations. Since trading volume was exceptionally high, the rapid sell-off created all the preconditions for a record low price in conditions of panic. Given that trading has never been more negative since the beginning of the price growth phase, analysts have reason for optimism in the long term. Trading trend indicators for gold suggest that its price is far from excessive euphoria. According to the monthly The Hulbert Financial Digest, the overall investment recommendation from analysts for gold was recently at minus 44%, never lower.

The latest weekly CoT (commitments of traders report) clearly indicates a positive situation, from the perspective of investment contrary to the prevailing trend. It confirms that the sector has largely been exposed to speculation in recent months. It seems that most optimistic investors have signed their surrender. According to this report, ‘the largest, wealthiest, and best-informed investors have positioned themselves for higher gold prices. On the other hand, the fact that speculative investors have significantly reduced their shares, which had grown while expecting price increases, signals a good opportunity for counter-cyclical investment. Currently available information on market positioning in futures is a recipe for pronounced growth.’ Since its record high level reached in August 2011, the price of gold has been in a phase of long-term consolidation, similar to the correction seen in the 1974-1976 period. As a result of extremely negative sentiment and clear positive implications from the CoT, analysts assume that the bottom will soon be reached. Given the current season, significant acceleration is not expected before August.

Comparing gold with other types of assets in the long term clearly gives a positive picture. In relation to both the money supply and stocks and bonds, gold remains below long-term average values. In relation to ‘non-financial assets’, some ratios are above average, however, they are not extreme values.

In this report, a quantitative assessment of gold has been made for the first time. With the help of a specific model, a wide range of possible scenarios for future U.S. monetary strategy and its effects on the price of gold has been taken into account. Even in the case of a small percentage probability in extreme scenarios, this model justifies a significant risk premium. Based on these parameters, the target price for gold has been set at 2,230 U.S. dollars.

The Erste report emphasizes that gold should be retained as an integral part of investment portfolios. Gold is the only form of liquid investment asset that is not tied to either debt or creditor-debtor relationships. Furthermore, it is the only internationally accepted means of payment independent of the state and a means of payment that has survived all wars and state bankruptcies. Its monetary importance, which has been established and proven over the past few centuries, is yet to be rediscovered. For centuries, gold has represented stable values, independence, and stability. The answer to the question of whether gold is becoming more expensive or the purchasing power of paper currencies is falling is a matter of personal perception.

The value of global assets reached 223 trillion U.S. dollars at the end of 2012. The value of gold available for investment is currently at 1.1 trillion U.S. dollars or just 0.5%. 

-We believe that in the future this share will significantly increase, given the essential features of gold as a global currency with a long successful history, free from credit risk or collection risk, highly liquid and a currency traded globally, and considering the very low inflation related to gold mining, features that are particularly desirable in current circumstances- it concludes in this report.