Central Bank Expansion Argues for Higher Fair Value Gold Prices


Gold has rallied impressively so far in 2016, but this does not yet mean that it is yet fairly valued. When the commodity is measured against central banking balance sheet expansion, fair value figures significantly higher than $1,300+ per ounce appear. This is not just an idea suggested by fringe elements predicting imminent financial collapse. Though Zero Hedge raised the idea of higher gold prices based on central bank money printing over a year ago, Deutsche Bank has recently gone to great lengths to make the case for substantially higher real values for the yellow metal.

The Case for Why Gold Should Be Substantially Higher

In July of 2015, financial site Zero Hedge brought up the idea that gold prices should actually be substantially higher based on the incredible expansion of central bank balance sheets. This was at a time when gold prices had pulled back significantly to just under $1,200 per ounce. The chart demonstrates what they predicted would be fair value for the safe haven metal currency based on the continuous growth of the major six central bank balance sheets. It takes into account the U.S. Federal Reserve, European Central Bank, Bank of England, Swiss National Bank, Bank of Japan, and People’s Bank of China.

Central Bank Expansion and gold

As you can see, Zero Hedge’s chart assigned a nearly $1,800 per ounce fair value to gold. That was a year ago, before the European Central Bank had been creating euros to purchase bank and financial assets throughout the eurozone at the rate of another 80 billion euros per month. It also predated the latest round of asset purchases that the Bank of Japan announced. Today this above chart would reflect an even higher price.

Keep in mind that at the time the price of gold had fallen considerably. One of the arguments in favor of higher gold prices surrounded how tight the physical gold supplies were. This supply constraint existed while demand remained extremely high for physical supplies of the precious metal.

Deutsche Bank Explains Why Gold Should Be Valued Much Higher

Well respected and mainstream international investment bank Deutsche Bank is now thinking along similar lines at the end of August 2016. Their analysts find a positive relationship between the prices of gold and the amount of monetary expansion that central banks pursue. Per this relationship, they claim that the yellow metal should be trading around $400 per ounce higher. What makes this claim interesting is they are not even considering as many central banks as did Zero Hedge with their 6 institutions.

Deutsche Bank is only looking at the activity of what they call the four main central banks of the United States, the ECB, Japan, and China. These four central bank balance sheets have grown by 300% from the start of 2005 to date. At the same time as these combined central bank balance sheets were expanded this much, the above ground world gold stocks increased by 19% in terms of tons. This amounts to a gain of around 200% in gold value, per the August 26 report of Grant Sporre and Michael Hsueh the Deutsche Bank commodity analysts.


Grant and Michael claimed that “If we were to assume that the value of gold should appreciate to keep the overall value of the big four aggregate balance sheet equivalent to that of the value of the above ground gold stocks, then gold should be trading closer to USD1,700/oz.”

This is an astounding claim from one of the largest investment banks in the world. They have made the case for gold prices being nearly $400 per ounce higher based on the growth in the world’s major central banks’ money supply. For a mainstream bank to treat gold as the currency it truly is represents a major coup for the yellow metal.

Deutsche Bank Stops Short of Predicting Near Term Gold Price Adjustment

Deutsche Bank’s impressive claim does not mean they are projecting gold will roar up to $1,700 in the near term. In fact, the report’s two authors noted that the metal is unlikely to reach such a price point soon. They feel it could even lose momentum short term.

“Let us be clear; we are not saying that gold will trade up to USD1,700/oz in the near term, but when viewed against the aggregated balance sheet of the ‘big four’ global central banks (the Fed, ECB, BoJ and PBoC) the argument can be made if we view gold as a currency, the metal is worth closer to USD1,700/oz, versus the spot price of USD1,326/oz,” they claimed.

Their argument for why gold would need more time to rise to $1,700 has to do with the momentum this year for central banks growing their balance sheet. For the year so far, gold prices have risen faster than the central bank money creation. This is why they feel that appreciation in gold prices will slow down for now. In any case, this fair value price for gold from Deutsche Bank is more encouragement to add it to your retirement accounts.

W. D. Crowder

W. D. Crowder is an American published author with decades of experience in financial writing. He specializes in many areas, including: investment, economics, international relations and more.