While several measures put gold in the expensive zone, the metal could rise over the next three months, according to Deutsche Bank.
The assumption is based on the scope for the US 10-year bond yield to fall to 2%, before rising to 2.75% by year-end, as data points to softer US growth momentum. Bond yields at 2%, the greenback 2% lower than current levels and the S&P500 dropping 5% can propel gold price to $US1,320/oz.
That’s more than 4% higher than current levels of $US1,265.25. The metal has climbed 10% this year.
Deutsche’s model suggests gold’s fair value should be $US1,185/oz. And the model suggests a year-end price of $US1,150/oz even when factoring in further political and financial uncertainty.
This table puts in perspective gold valuations:
As the table shows, gold is trading well above fair value in eight of the nine models.
Here’s Deutsche Bank’s view:
There are very discrete periods when gold trades above the model forecast as well as below. Our interpretation is that when gold trades above, the market is going through a period of heightened risk perceptions, be it the expectation of a collapse in the global financial system or rampant inflation. Over the past 10 years, we have had an extended “bull market” period lasting 3 and half years and an equivalent “bear market” of 3 and a half years. The current “premium” period for gold started in February 2016. We expect this environment to continue into 2018.
Nevertheless, Deustche Bank said it retains its “cautious-to-neutral” view on gold.