Government Watch

European Banks See a Positive Year for Gold

dt-gold-bullion-coin-march-2015Gold has been fairly “flat” so far this year in terms of the euro, but that’s far better than gold’s 10% decline in dollar terms.  Gold began the year at about 970 euros per Troy ounce, and that’s where it stands today.  Maybe that’s why European banks tend to be more positive on gold’s outlook than U.S. banks.

Specifically, Germany’s Commerzbank sees gold gaining ground in 2016, even if the Fed raises rates three times: “We expect to see prices perform better in the new year once the Fed has implemented its first rate hike in mid-December, thereby dispensing with one key factor that has been weighing on prices this year.” Commerzbank thinks that “robust demand from Asia” will push gold to “$1,200 per troy ounce by the end of 2016. Silver should likewise make gains in gold’s slipstream, especially since rising physical demand will meet with falling supply.” Even if the Fed raises rates three or four times in the next year, they see gold rising: “During the last cycle of rate hikes, the gold price was able to gain 11% within one year following the first rate hike, despite the subsequent series of rate increases.” They are referring to 2004 to 2006, when the Fed raised rates 17 times by 0.25% each time, raising rates from 1% to 5.25%.

“Because far fewer rate hikes are expected this time,” they said, “the gold price should be able to make similarly strong gains in 2016, even if the U.S. dollar appreciates further, unlike last time.” No matter what happens to the dollar, they believe that the main driver of gold prices will be Chinese demand, and a pickup in Indian demand.  They also forecast that central banks will continue to buy gold. They see gold rising even faster in 2016 in euro terms.  Since the European Central Bank is cutting rates while the Fed is raising rates, Commerzbank thinks the gold price in euros is likely to rise more than gold in U.S. dollars. Commerzbank said it sees gold at 1,165 euros by the end of 2016, up about 20% from 970 euros today.

Switzerland’s UBS Bank is not as bullish as Commerzbank, but they predict that the chances of a short-covering rally in gold is now greater (“elevated”). As we said last week, there is a large group of bearish speculators who sold gold short, expecting the price to fall further.  If gold begins to rise strongly, these “shorts” must buy back the gold they already sold.  This “short covering” can be a very bullish situation.

UBS says that the number of shorts suggests that the gold market has been expecting a gold price collapse after this week’s presumed Fed rate hike.  Meanwhile, “net speculative longs are currently at the lowest in 14 years.” The most recent Commodity Futures Trading Commission data show gross shorts within 7% of a record high, so they concluded: “Extreme short positioning suggests that the risk of a more dramatic short-covering rally is currently elevated, particularly if a rate hike is accompanied by dovish rhetoric.”

England’s Sharps Pixley also predicts a recovery for gold in 2016.  The London-based metals firm sees “gold leading the way and commodities following thereafter,” They think that gold’s bottom, if not already set, is “not far off and once that is reached – and more importantly perceived to be reached – it should be set to rise sharply.  In any case we do see the downside from now on to be decidedly limited.”

 Of course, America’s Goldman Sachs and Bank of America are still negative on gold, and they will probably remain that way until gold reaches $1200 or more.  Goldman Sachs says “we maintain our $1,000 per ounce gold price forecast over the next 12 months.”  Bank of America Merrill Lynch says “there are still good reasons to be bearish on gold, at least in the first half of the year.” They see a drop to $950 gold in the first quarter, with perhaps a recovery coming later in the year to $1,250 per ounce.

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7 years ago

As a small part (3 to 5 percent) of one’s overall total investment portfolio, gold makes sense as a long-term inflation hedge as governments around the world continue to devalue their currencies as a means to handle their growing national deficits. Their objective is to make both interest and principle payments on outstanding national debt in currency that is worth less and less over time. The Keynesians think this is a wonderful way to keep the borrowing binge going, by being able to repay outstanding loans with money that is worth less and less over time. Progressives view this as “devaluing your way to prosperity”, which is course what leads to national impoverishment. For many world leaders, who have no concept of what a strong monetary policy actually means or have the discipline to enact it over the long haul, artificially created inflation or as they like to refer to it, currency deflation, is a boon. It’s a great way, at least for a short-term, for national governments and their leaders unable to exert any sort of control on wasteful spending, to continue rampant out-of-control spending. Of course it’s terrible, in the long-term, for the average person who is forced to see the value of his or her savings eroded by this inflation.

As to the specifics of the article, yes the commodity traders at these institutions do indeed expect a modest up-tick in the price of gold in 2016. For such people any small rebound in the price of gold or silver will be a welcome relief to the kind of loses they sustained in 2015. If gold were indeed to return to the $1,200 mark that Commerzbank forecasts, that would simply be a return to what gold was selling for in late December 2014 or early January 2015. So one has to keep these price movements in historical context. Since most members of AMAC are NOT professional commodity traders in either gold, silver, platinum or palladium, the transitory price movements of precious metals are of less importance, than the long-term viability of these metals to retain their value over time. Still it is useful to inform the average person of what the expected price movement for precious metals may be, if the traders’ forecasts are accurate, over the next 12 months.

7 years ago

Metals are a good investment! Period!
Should the economy collapse,(Lord, let’s hope not!) greenbacks will only be worth fire starter, and not even very good at that!
The dealers I’ve worked with tell me if there is a significant climb in interest rates, the metal market will drop.
Not being that involved, I can only surmise that people (businesses etc.) with large sums borrowed and metal in reserve, will dump their metals to pay off mortgages before the interest becomes overbearing.

Ivan Berry
7 years ago

So, if you don’t play the market, buying long or short nor expecting a quick profit, gold still makes sense for the long haul. The overall trajectory is still upwards over time as central banks keep creating new debt and new money. The metals make a good hedge, even though they should never be seen as an “investment” like stocks in businesses for profit.

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