Earlier this week, analysts at Deutsche Bank published research claiming that gold should be trading at $1,700 an ounce, due balance sheet expansion at central banks. Not to be outdone, Australian bank Macquarie has come out with an even more optimistic forecast for the price of the yellow metal.
According to Macquarie’s commodities research team, gold should be trading at $2,000/oz. The team argues that with all the prevailing political and economic uncertainty stalking the markets, the price of gold should be around 53% higher than it is today.
Why isn’t gold worth $2,000/oz?
Why isn’t the metal worth $2,000/oz? Macquarie has three theories.
Firstly, the bank’s analysts take a page out of the S&P 500 CEO’s handbook and blame the strong dollar. Just as S&P 500 companies have been blaming the strong dollar for weak earnings for the past 24 months, Macquarie points out that if measured in other currencies the price of gold is much closer to its 2011 peak.
For example, in sterling terms, the price of gold is around £1,000/oz at the time of writing compared to the 2011 peak of £1180/oz. Meanwhile, gold priced in South African rand is trading more than 33% above its 2011 high of ZAR 15,000 at ZAR 19,157. That said, this rally has more to do with a weak rand and South Africa’s economic troubles. Since 2011 the rand has lost a tremendous amount of value, up from 7.1 to the dollar in 2011 to 14.6 today as devaluation that will have wiped out almost all of your gold gains.
Gold demand is lacklustre
The second theory Macquarie has about gold prices is the lack of physical demand. The analysts write that the slump in jewellery during the first quarter of this year (lacklustre demand continued into the second quarter), probably held the gold price back. Essentially moot point. Most investors probably don’t need Macquarie to tell them the price of an asset will fall when there’s no demand.
On the topic of demand, HSBC claimed last month that emerging market physical purchases start to decline when the price of the yellow metal reaches $1,400/oz, essentially capping any gains. On the other hand, past trends show emerging market physical demand will accelerate if gold prices dip to $1,200/oz. Simply put, physical demand cannot be relied upon to drive gold’s price infinitely higher. The figures tell the story here. During the first quarter of 2016, demand rose nearly 19% year-on-year due to the revival in ETF investment demand (up almost ten times on Q1 2015 levels). Net long speculative positions on the Comex surged from 1.9 million/oz at the beginning of the year to more than 32.6 million/oz on 28 June. Yet as investors queued up to get their hands on gold, jewellery demand — the single biggest component of consuming physical demand — slumped by more than a fifth during Q1 2016. Technology and central bank demand also fell slightly. Coin and bar demand was unchanged.
The final theory in Macquarie’s flimsy thesis of why the metal should be at $2,000/oz is that the price of the yellow metal started from a low base. According to the bank, the low of the current bull cycle was just below $1,050/oz, more than half of the 2011 peak. Therefore, it is harder to bid the price up to $2,000/oz. Probably another moot point but at least it’s something to keep readers happy over the summer months.