Deutsche Bank: Here's How To Know When Gold Prices Are Too High

Is gold in a bubble? There’s no question that it’s been moving up pretty quickly in the past 10 years:

Gold price since 1970s

Photo: FRED

On the other hand, many analysts are still bullish, especially given the recent announcements of accommodative monetary policy from the world’s three largest central banks.

Deutsche Bank sees $2000 gold soon. And Citi says it could go to $2500 in six months. 

In a note to clients today, Deutsche Bank commodities analyst Michael Lewis explains how investors will know when the price of gold becomes truly excessive:

The gold price would need to move above USD 1,880/oz to represent an all time high in real terms. However, versus physical and financial assets, gold prices would need to rise to much higher levels to be considered excessive. Figure 1 examines the level of the gold price that would be considered extreme against a selection of indicators. On the seven measures we track, gold would need to hit USD 2,390/oz to reduce the purchasing power of an average G7 consumer to its lowest level on record. Moreover the gold price would need to hit USD 2,960/oz to represent an excessive valuation versus the S&P 500.

We therefore view the latest gains in the gold price as sustainable. Indeed another potential catalyst for further price gains in the gold price could be fears towards the US fiscal outlook. Indeed left untouched US tax and spending plans would be sufficient to push the US economy back into recession. Consequently politicians have a delicate path to tread between ensuring credibility in debt reduction but at the same time not jeopardising the recovery. Figure 2 therefore examines the performance of various commodities before and after the US sovereign downgrade last August. We find gold prices were a beneficiary while industrial metal and energy prices suffered.

And here is figure 1, which shows what would be considered extreme valuations of gold against various measures:

Extreme levels of gold prices

Photo: Deutsche Bank

By those metrics, gold still has a bit further to go.

MORE: Deutsche Bank explains how a gold standard could work in today’s economy >

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