The price of gold could rally to $4,200 as the Federal Reserve tries, and fails to normalize monetary policy over the next few years according to analysts at CLSA.
CLSA has long been a gold bull, advocating the yellow metal for its model portfolio since 2002. So far, this trade has yielded mixed results. After the price of gold rallied to a high of $1,921 an ounce in 2011, it has since retreated and currently sits just over $1,300/oz.
Time To Buy Gold For 2018 As The Run-Down Starts?
Still, 2017 was a healthy year overall for the metal. At the end of December, prices staged a strong rally driven higher over the past 12 months mainly by a weaker dollar and safe-haven buying prompted by global political uncertainties. As a result, 2017 was the best year for the precious metal since 2010.
There has been some concern that the bitcoin bubble has distracted gold bugs. As the price of bitcoin surged towards the end of last year, the price of gold declines. However, Goldman Sachs put an end to this rumor at the beginning of December. Jeffrey Currie, global head of commodities research for Goldman argued in a research note published on December 12 that there has been “no evidence of a mass exodus from gold”:
“Second, there has been no discernible outflow of gold from ETFs. Indeed, total known gold ETF holdings recently reached their highest level since mid-2013 (currently up 12% YTD)”
The report went on to note some fundamental differences between these two assets:
“While bitcoin has a mathematically certain total supply, and gold has a finite (but less certain) supply in the earth’s crust, even a cursory examination shows very different market dynamics. We believe the composition of demand between bitcoin and gold is the key difference in the recent price action. In our view bitcoin is attracting more speculative inflows relative to gold… While the lack of liquidity and increased volatility may keep bitcoin interesting, it is unlikely to convince investors looking for the kind of diversification and hedging benefits which gold has proven to possess over its long history.”
Using gold as a hedge against central bank mistakes has been the trade of gold bulls since the financial crisis. This year, as the Fed finally starts to run-down its balance sheet this trade may ultimately yield results. The price of gold has already got off to an excellent start to the year thanks to the falling dollar. If the dollar continues to weaken, or the Fed’s unwind stalls, expect further gains ahead.