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Pessimists and optimists drive gold price says Source

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ETF providers Source says that the surging interest in gold this year is being driven by both pessimists and optimists. 

The firm writes that while pessimists see gold as a haven from potential market crashes, optimists are using the yellow metal to hedge bullish exposure in higher-risk assets elsewhere in their portfolios. 

Matt Johnson, Head of European Coverage at Source, says: “There are some investors, most likely a minority, who feel they need to be super-cautious and buy safe assets. With a significant proportion of hard currency government debt delivering negative yields, the obvious choice is gold.
 
“On the other side, the ultimate optimists are happy to buy equities and high yield but are covering themselves against a serious downturn by buying gold. They are confident that central banks are in control of the situation globally and will do everything possible to support risk assets because pension funds could otherwise be under significant duress, leading to economic shock. Hence, rates are going to stay low for longer, which will also be supportive for gold.”
 
Matt Johnson believes the anticipated rise in US interest rates, which would potentially make gold less attractive as the yield increased on other assets, will have a minimal effect on gold. This is because of the strong demand for gold, especially in Asia, where gold is seen as a store of value in a deflationary environment.
 
The firm writes that if gold, which is currently trading at around USD1,350, falls to USD1300 per ounce then it will be a good buying opportunity, he believes, while it is hard to call the ceiling. He says: “Gold could spike or work its way slowly higher until every equity market is yielding 1 per cent and bonds nothing or less. That will be when the end-game is reached.”
 
Source’s 12-month forecast for the gold price ranges from USD664 to USD1,532. The lower estimate assumes economic normalisation, real US bond yields realigning themselves with long term economic growth of 2 per cent and the Fed succeeding in keeping inflation at around 2 per cent. The higher estimate is based on recession arriving quickly in the US, inflation expectations of 1 per cent and a 10 per cent appreciation of the US dollar resulting from a flight to safety. However, if the dollar were to slip 10 per cent this would put gold even higher at USD1,835, suggesting another 35 per cent upside in gold.

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