Gold has been a standout performer against all other asset classes this year.
But despite economic and financial market uncertainties, we do not believe it is a one-way bet.
The high gold price is unsustainable, in our view, unless the U.S. enters a recession or the U.S.
Federal Reserve completely reverses course on monetary policy.
Gold has outperformed all other asset classes this year, as falling bond yields and negative interest rates pique investors' interest. Because rates are now negative in many developed nations, the opportunity cost of holding gold has fallen relative to assets that pay an income, such as bonds. This raises its appeal as an insurance against further financial market turmoil.
We expect the price trend to reverse if U.S. economic data improves. Stronger U.S. data should allow the Federal Reserve to normalize monetary policy further and earlier than currently predicted by federal funds futures.
While gold price should come under pressure again, our view is that the structural decline in gold prices is over. Negative real U.S. rates, newfound investment demand, and central bank purchases are supportive of gold at around $ 1,200 an ounce over six to 12 months.
Falling mine supply is another supportive element, although higher gold prices should increase scrap supplies and might raise the prospect of availability over and above our expectations.
Nevertheless, unless you expect a U.S. recession and the Fed to reverse course completely or engage in another round of quantitative easing, gold's current price rally is likely near its peak.
Non-investment gold demand is likely to weaken at these price levels, and we expect import statistics and regional price spreads to confirm this in the coming weeks.
Taking large positions in gold as an insurance against a broad-based global financial crisis is an overly dramatic step. Investors who have opportunistically held gold into the beginning of the year have an opportunity to exit these positions with a significant gain. In anybody's terms, gold now looks richly priced against all other assets and commodities in particular.
Not everyone agrees with this opinion about the US economy, and the world monetary policies. |
