Loading ...Deutsche Bank Calculates The “Fair Value Of Gold” And The Answer Is…
Over the past three years, gold has found itself in an odd place: while it still remains the ultimate “safety” trade and store of value should everything go to hell following social and monetary collapse, when it comes to “coolness” it has been displaced by various cryptocurrencies, all of which have vastly outperformed the yellow metal in recent months. Meanwhile, central banks continue to pressure the price of gold to avoid a repeat of 2011 when gold nearly broke out above $2,000, putting the fate world’s “reserve currency” increasingly under question. As a result, gold has traded in a rather somnolent fashion, range bound between $1,100 and $1,300 over the last few years, failing to break out on either side.
But is that a fair price for gold?
The scale we apply ranges from -20 to 20, with each point accounting for USD10/oz. This is the minimum and maximum range of the deviation. The current gap of USD80/oz or 8 on our scale would suggest an above average sense of risk or uncertainty in the market. If we apply the DB house view forecasts at year end for the US 10 year bond yield of 2.75%, a US 10 year break even of 2.15%, an S&P year-end target of 2600, IMF gold purchases of 5 tonnes and a USD up 7.6% versus the broad trade weighted basket, then gold should trade all the way down to USD1,031/oz. Even if we increase our risk perception index from 8 to 12, this brings us back to USD1,150/oz by year end. In the near term however, our US rates economist Dominic Konstam sees scope for the US 10-year bond yield to fall to 2% (before rising to 2.75% by year-end), as falling excess liquidity points to softer US growth momentum ahead. If we apply a US 10 year bond yield of 2%, a USD down 2% from current levels and the S&P500 down 5% from current levels, our fair value model points to a gold price of USD1,320/oz.