Since gold is often used as a hedge against inflation, so in the current low inflation environment where everyone is starved for yield it seems like a strange time to start buying gold. But Sterne Agee analysts Michael S. Dudas and Satyadeep Jain argue that the Fed’s zero interest rate policy (ZIRP) and accommodative monetary policies from other central banks will drive gold prices higher.

gold prices sterne 0714

Gold prices track global liquidity and balance sheets – normally

“Visible continuity from the Federal Reserve Board regarding an elongated ZIRP, a reversing trend in the value of the dollar and supportive investor interest should allow gold prices to move higher,” write Dudas and Jain. “Any added easing from the European Central Bank combined with economic and wealth-driven demand growth from China should aid price trends as well.”

Dudas and Jain argue that the Fed’s outlook on the US recovery is overly optimistic and that even if tapering continues as planned, interest rates will have to stay low for longer than it currently expected. They also point out that there is a long standing correlation between global liquidity and balance sheets.

wra v Gold Prices 0714

wld v gold 0714 Gold Prices

While the correlation is pretty clear between 2003 and 2012, it has fallen apart in the last few years. This isn’t enough to dramatically change the trend line in Figures 10 and 12 above, but we’re currently living in the outlying blob well below that trend. It’s certainly possible that we’re due for a regression to the mean, but no one can argue that we are living in typical macroeconomic conditions. A changing correlation between liquidity and spot gold prices wouldn’t be the strangest thing we’ve encountered in the last year.

Technical analysis points to a higher gold price: Sterne Agee

Technical analysis also points to a possible inflection as the 150 day moving average has bottomed out and the price has been marked by higher lows recently. Dudas and Jain also argue that there is strong seasonal support for gold right now because it has gone up between June 30 and October 31 eleven out of thirteen times since 2001, though without giving a good reason for the trend it’s hard to see why someone should consider it when making investments.

It’s been said that investors can be divided into those who believe in gold and those who don’t, but for those who do this could be a good entry point.