As this is written, gold is near a four month high and silver is trading at its highest level since October. According to a Bloomberg report, investors are rediscovering the comfort of owning precious metals in an atmosphere of disappointing US economic data and the political upheaval in Ukraine.

Meanwhile, in China, growth in real estate prices, so far taken for granted, appears to be leveling off – causing a knee jerk reaction in Chinese stocks which closed the day with losses of 1.75%. A CNBC article quotes a report from Lombard Street Research saying that Chinese monetary authorities may be secretly planning to convert the yuan into a gold-backed international currency – primarily to deliver the dollar its comeuppance.

Speculators, it seems, are back on the gold bandwagon. Data from CFTC shows that large players such as hedge funds and portfolio managers boosted their long exposures by nearly 31% as on February 18.

Is gold coming back to a prodigal welcome from the markets?

Sterne Agee analysts Michael S Dudas and Satyadeep Jain would seem to think so.

“While developed and emerging economy monetary stimulus, global investor perception regarding currency values, supportive central bank purchases and direction have shifted, we believe gold prices should rebound after repairing technical damage,” they say in their research note ‘Gold and Silver Fighting the Consensus – And Winning.’

Gold price forecasts

Gold prices could vary between a high of $1,450 and a low of $1,100, and could average about $1,300 per oz. in 2014, estimates Sterne Agee. Silver is forecast at $23 per oz. but with a potential to rise to $25 per oz.

In 2015, average prices are estimated at $1,400 per oz. for gold and $25 per oz. for silver.

Gold in cinemascope

This chart is a valuable study of gold and the triggers that acted on its price after 1970.

Gold prices 1970 2014

The primary factors that caused the most recent fall in gold were the Fed’s taper, the sustained rise in equity, the dollar’s strength and technical selling.

Sovereign balance sheets continue to expand

The analysts point out that gold has traditionally correlated strongly with data related to global country balance sheets, as shown in the chart below.

2-glob-balance sheets

Of late the correlation appears to have turned negative. However, “We expect combined assets of the U.S. Federal Reserve, the European Central Bank (ECB) and BOJ could reach somewhere between $8-$9 trillion in 2014, and possibly stay at that elevated level for some time,” warn the analysts.

Excess liquidity another positive driver

“Our positive bias toward gold price level and direction reflects our belief that excess liquidity will eventually be recognized in the price of commodities in general and gold in particular,” says the research note. “We contend global investor and policy sentiment, as well as currency perception drives gold price movements rather than traditional supply-demand analytics.”

Noting that gold has traditionally correlated strongly with the data such as global liquidity levels and sovereign actions of monetary easing, the analysts observe that the U.S. Fed, Japanese central bank and other central banks are still aggressively buying assets and increasing overall liquidity levels.

3-global-liquidity

Physical demand

Chinese demand that appears at lower prices and the likelihood that Indian restrictions on gold imports could be lifted are other macro factors that are a positive influence on gold.

4-china-india

The analysts also expect that Central Banks would be strong buyers of gold in the future.

US public debt

The analysts observe a 98% correlation between the US public debt and gold prices, as can be observed from the chart below. With federal debt projected to rise to post-World-War-II levels (as a percentage of GDP) by 2038, gold prices could be headed much higher.

5-us-debt

Gold miners in corroboration

Sterne Agee also observes that mining companies have adjusted their business models to the new, low-price environment and a sustained performance may now be expected from them.