$1,700/oz Gold: Rate Hike Or Not

August 29th, 2016 by

If you follow the financial news, you know that everyone is talking about rate hikes (or the possibility thereof) right now. It would seem to the casual observer that everything is tied to whether or not the Federal Reserve decides to raise interest rates.

$1,700/oz Gold?

deutsche_bankIn a recent note, a pair of Deutsche Bank analysts argued that gold “should be trading over $1,700/oz” if you compare bloated central bank balance sheets to the above ground global gold supply.

Over the past decade, the aggregate balance sheet of the U.S., EU, China, and Japan have grown fourfold (300%) while the stock of above ground gold has only increased by 200% in terms of dollar value. Deutsche Bank believes a $1,700/oz gold price better reflects this imbalance.

Yet, it’s worth noting that Deutsche Bank may be looking to liquidate its positions in gold, so it could be trying to hype up a rally for its own benefit!

This forecast is given in spite of the heightened expectations of a rate hike from the Federal Reserve this year, perhaps as soon as the September FOMC meeting. However, the analysts at Deutsche Bank may be well-served to discount this factor.

Historically, an imminent rate hike alone is not sufficient to stem the medium-term bull market rally that is building in gold.

Source: Bloomberg

Source: Bloomberg

In the past, gold has performed well in the first 100 days of a Fed rate hike; it’s only high interest rates in the long run that gold prices tend to react negatively to. For Deutsche Bank, balance sheet growth for central banks seems to hold more sway than where interest rates are set. Though it has taken the gold market two years to recover from the “flash crash” in prices in April 2013 following the Federal Reserve’s taper off of quantitative easing (QE), the expansion of central bank balance sheets around the world through QE continues to be supportive of higher gold prices.

Moreover, assets that traditionally offer safety have been hard to come by in an economy riddled with problems—think: negative-yielding bonds.

Bouncing from Support Levels

charting gold priceOther technical analyses show that gold could be poised to rise because it is successfully testing its lows. According to Scott Shellady, Senior Vice President of TJM Investments, gold could certainly begin to climb higher after testing its bottom around $1,300/oz (as it is doing right now).

Gold prices have yet to slip back below $1,300/oz since crossing that key threshold. Technical charts tend to indicate that this means the yellow metal is still firmly in an uptrend until this support level is breached.

Irrespective of whether or not the Federal Reserve decides (if or when) to hike interest rates, the prospects for the gold market remain bullish over the longer run. The precious metals (and the markets at large) can only be “held hostage” by Janet Yellen and the Fed for so long.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.