Gold is a bubble which will burst, according to Rabobank chief investment officer Han Dieperink. In his latest update on financial markets, he expects gold to drop below $500 per troy ounce, much lower than the current price of about $1.315 per troy ounce. He sees a pattern in the price of gold which resembles a bubble that is about to burst, presented in the graph below. Apparently, he doesn’t take into consideration the lowest interest rates ever recorded in human history and the fact that central banks are adding gold to their reserves.

goud-zeepbelAccording to Dieperink, the inflation-adjusted price of gold has been around $400 per troy ounce for the last hundred years. From his perspective, the rise of gold to $1.900 per troy ounce back in 2011 was clearly a bubble. Based on his bubble theory, he expects the gold price to fall by as much as 70% to a level below $500 per troy ounce. The Rabobank analyst made a similar forecast in late 2015. Since then, the price of gold rose from a multi-year bottom of $1.060 all the way to $1.370 per troy ounce.

Rabobank still negative on gold

While analysts from ABN Amro, JP Morgan and Credit Suisse revised their gold forecast to a new reality of lower rates and more quantitative easing, the Rabobank sticks to the $500 scenario. Dieperink points to the negative interest rates, the Brexit referendum and fear in the financial markets to explain the rising price of gold since the beginning of this year. But apparently, he doesn’t expect those fundamentals to have a long-lasting impact on the price of the precious metal.

rabobank

Rabobank expects gold to drop to less than $500 per troy ounce

Gold is not a commodity

According to Dieperink, there is no reason why the price of gold can’t drop below the cost of production (about $850 per troy ounce), because there is a huge above ground supply of gold in the market. This is a weakness in his reasoning, because the value of gold is not determined only by it’s use as a commodity. If that would be the case, the metal would have been worthless already, since there has been a substantial supply of above ground gold for centuries. The stock to flow ratio of gold will gradually increase over time, due to large scale gold mining.

For central banks and a large part of the world population, gold is more a wealth reserve than a commodity. The use of gold in industry is limited, because there are often cheaper alternatives around. Instead, most of the gold is held by individuals and centrale banks in the form of jewelry, coins and bars. In other words, as an alternative store of value and as a wealth reserve. The price of gold doesn’t go to zero, because the metal is being hoarded by savers and investors around the world.

In an environment of negative rates and with growing distrust towards central banks and governments, more people favor physical gold over paper financial assets. Russia, China and other central banks are not buying gold to make a buck from a new bull market in gold. No, they buy it as a tangible wealth reserve besides foreign exchange reserves.

Flight to safety

The wealthy are looking for a safe haven and the number of options is shrinking rapidly. When you think gold is a bubble, you might want to call government bonds a bubble as well. What is the purpose of buying a government bond, if the expected cashflow is zero or even negative.