Gold prices soared during the worst days of the health crisis, but have fallen back recently. What are the factors that could push the price in either direction?
Typical valuation frameworks don’t apply to gold. Without a coupon or dividend, discounted cash flow models can’t be built. There are no expected earnings or book-to-value ratios either. Conceptually, four drivers explain fluctuations in gold prices (figure 1). First, periods of economic growth tend to raise gold demand for jewellery, technology and savings. Second, bouts of uncertainty often boost demand for gold as a safe-haven investment, for diversification and hedging. Third, the opportunity cost of holding competing assets is a key determinant. Fourth, capital flows and positioning have an impact too, by amplifying or dampening the momentum in gold prices.
Our statistical models indicate that, based on historical correlations with key drivers, we’re at around ‘fair value’. Real yields are a particularly important driver for our gold outlook, and we see them at low (but not lower) levels for an extended period of time.
Our analysis of past cycles indicates that gold returns would tend to be weaker during the early stages of the cycle, and stronger during the later ones. However, it also highlights that the US dollar weakness we project – along with real yields at rock bottom – are generally associated with rising gold prices, pointing to some upside over the medium term.
Our work on gold supply and demand suggests that, at shorter horizons, gold ETF holdings are a key swing factor. After record inflows, the past few weeks have seen outflows – with some momentum lately – pointing to downside risks.
Putting it all together, we recalibrate our gold price forecast. We now expect a modest increase to about 1,900 $/oz at the end of next year, some 100 $/oz lower than our previous forecast. Our view is that, over the next few months, we may see quite a few oscillations: investment flows may continue to correct for some time; but the all-important drivers of rock-bottom real yields and US dollar weakness should remain quite supportive. More broadly, most fundamental factors are positive for gold, although the majority of them don’t indicate that prices should be higher (or much higher anyway). The outlook for 2022, being so far away, is quite uncertain. On balance, the fundamentals won’t really change, in our view, with one exception: we may see higher inflation the year after next. This is why we confirm our forecast of 2,000 $/oz.
As we think about gold as an investment, there can be different reasons for having it in a portfolio:
*Bloomberg market data.
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Chief Economist & Macro Strategist
Group Head of Asset Allocation
Group Chief Investment Officer