Tag: forecast

Rabobank: “Gold is a bubble which will burst”

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.

According 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 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.

20 juli 2016
ABN Amro revised gold price forecast to $1.300

The ABN Amro revised their gold price forecast for 2016 from $900 to $1.300 per troy ounce. The upward revision is remarkable, because the bank held a negative stance towards gold for the past couple of years. As recently as December last year, precious metals analyst Georgette Boele was still convinced the gold price would find a bottom at around $900 during 2016. In her forecast for this year, she wrote about the downward pressure on gold because of the expectation of more rate hikes by the Federal Reserve.

Boele explained she was caught by surprise by the sudden turmoil in the financial markets, which painted a bleak picture for the state of the world economy in both the United States and in the emerging markets around the world. Boele is expecting more trouble ahead for those countries relying on the export of commodities.

Interest rates

She also revised her expectations regarding the Federal Reserve monetary policy. The probability of a rate increase by the Federal Reserve diminished substantially because of the downturn in the stock market and the sudden move to safe havens like precious metals. With higher interest rates, buying gold becomes less attractive, because the yellow metal doesn’t yield any interest or dividends.

Expectations of rising interest rates drove the price of gold down to the lowest level in more than five years, but now the outlook has changed. Falling share prices and the exceptionally low price of oil suggest that the global economy is growing at a much slower pace. As a result, banking stocks are under even more pressure, losing 20% on average since the start of 2016.

Gold price moving up

The price of gold has risen more than 15% this year, a strong rally making it the best performing commodity of 2016 so far. The sudden price increase from the lowest level in five years caught analyst Boele by surprise. In an explanation for Bloomberg she said: “Having been long-standing bears we have now turned bullish on precious metal prices. Our new scenario sees a longer period of weaker global growth.”

She also revised her 2016 forecast for other precious metals. From $15,00 to $16,50 per troy ounce for silver and from $900 to $1.050 for one troy ounce of platinum.

ABN Amro was expecting $900 gold in 2016 just a few months ago

This article is provided by Goudstandaard.com

19 februari 2016
Banks cannot forecast gold prices

Based on a short analysis of bank forecasts, we can conclude they are clueless about the direction of the goldprice. Last year we already gathered some forecasts by a number of big commercial banks and now we’ve added the most recent forecasts for 2014. Early 2013, when the gold price was about $1.650 per troy ounce, almost all banks expected prices would rise to $1.800 or even more dollars per troy ounce. Deutsche Bank and Merrill Lynch even expected the price would reach or surpass $2.000 per troy ounce in 2013. The lowest forecast was still $1.650 per troy ounce, so basically none of these banks expected the drop in price we saw last year.

Gold price forecasts by ten different banks through time

Bank analysts extrapolate past gold returns?

After the violent price drop of gold in the first half of 2013, many banks slashed their forecasts for both 2013 and 2014. The red and green bars in the graph show the sudden adjustment to the new reality. Compared to just one year ago, banks slashed their forecasts by hundreds of dollars. For 2014, these banks expect a further price drop to on average $1.187 per troy ounce. That's as low as the 2013 bottom!

Contrary to what most banks expected, the yellow metal made a nice rebound in early 2014. This year, the price of gold has already gained more than 10% and surpassed the 200 day moving average. This year, the difference between the average gold price and the predicted gold price for 2014 is already $75 per troy ounce, as you can see from the chart below. It seems like bank analysts tend to extrapolate past returns. They were too optimistic in early 2013 and they seem to be too pessimistic on gold right now.

Difference between gold forecast and the actual gold price

27 februari 2014