Gold price rallies but remains below record high

Updated on

The gold price reached a new record high over the last few weeks, touching $2,065 an ounce. The gold price remains below the record high and below $2,000 an ounce, but analysts generally agree that more upside is just around the corner.

Get The Full Series in PDF

Get the entire 10-part series on Charlie Munger in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.


Q2 2020 hedge fund letters, conferences and more

Gold price hits record high

Credit Suisse analyst Fahad Tariq said in a recent note that the previous record high gold price in nominal terms was set in September 2011 at around $1,900 an ounce. In real terms, which factors in inflation, the record high gold price was at $2,800 an ounce in January 1980. Although the yellow metal pulled back last week, it was still up by about 25% year to date.

Tariq increased his 2021 gold price forecast from $1,800 an ounce to $2,500 an ounce. His forecast for 2022 rises from $1,650 to $2,200 an ounce. For the rest of this year, he expects gold prices to average about $2,000 an ounce.

Risks to his forecasts include a better-than-expected economic recovery and a hawkish shift by the Federal Reserve on interest rates.

Support for gold prices after pullback from record high

He added that macroeconomic factors remain very supportive for the yellow metal despite the recent pullback. He noted that the correction was rather expected as the gold price climbed about $280 or 16% in only one month.

However, his medium-term outlook for the metal is still bullish, and he feels that the macroeconomic factors appear to be "ideal" for it. He pointed out that the 10-year U.S. TIPS yield is about -1%. He added that a move to -2% would imply that the gold price would rise to $2,200 an ounce.

Weakness in the U.S. dollar as the dollar index fell to its lowest level in two years has also given gold prices and demand a boost. Inflation is factored into the TIPS yield. He said there seems to be widespread expectations of inflation due to the unprecedented monetary and fiscal stimulus and policies.

Strong investment demand, weakness in jewelry

Tariq noted that the World Gold Council said in its first-half report that record inflows to gold-backed exchange-traded funds offset major weakness in jewelry demand, which plunged 50% year over year. Demand from central banks also slowed during the first six months of the year.

Despite those declines, the gold price rallied and approached record highs. Tariq said when demand for gold jewelry accelerates alongside GDP growth and central banks start buying the metal again, he expects an overall improvement in gold demand. That could push prices even higher.

So far among the gold companies that have reported their second-quarter earnings, he said there continues to be discipline from North American firms. He said they continue to focus on generating free cash flow, deleveraging and returning capital to shareholders by paying higher dividends.

Gold price targets increased

He said the companies in his coverage universe are conservatively using $1,200 to $1,300 an ounce for their planning and evaluating projects. Mergers and acquisitions are still a point of discussion for intermediate gold producers wanting to grow. However, activity is still more muted than expected, possibly because companies can't do onsite due diligence due to COVID-19.

Tariq boosted his target prices for gold companies and continues to rate Barrick Gold, Newmont, Agnico Eagle Mines, Yamana Gold, and Endeavour Mining at Outperform.