Just last week, you read here about how Deutsche Bank predicted the fair value of gold should be at $1,700 or more per ounce. Their argument was based on the expansion of the central bank balance sheets from the world’s four major central banks the U.S. Federal Reserve, the European Central Bank, the Bank of Japan, and the People’s Bank of China. In an interesting twist on the idea for substantially higher gold prices, Macquarie Bank Research has attempted to explain why gold has not rocketed up to its literal or inflation adjusted high from 2011.
The 2011 Inflation Adjusted High for Gold
Gold reached just over $1,900 per ounce in 2011 before it began a steady pullback and correction lower. In terms of the inflation adjusted high from that point five years ago, this represents a $2,000 per ounce price today. Yet gold is is mired in the lower $1,300’s per ounce price range. This is not an insignificant price when you consider that it is up over 24% on the year. It is a poor price point if you consider that the yellow metal has experienced a record surge in investment for 2016. As Macquarie Research pointed out in their report they released last week, today’s $1,325 per ounce is still almost $600 below the actual 2011 high and nearly $700 away from the inflation adjusted one. They give several reasons to explain this phenomenon, all of which deserve closer scrutiny.
Why Gold Has Not Reached Its Inflation Adjusted High
The Macquarie Research department analysts have three main arguments for why they believe gold has not reached or exceeded its over $2,000 inflation adjusted high. Even at the high of this year at $1,366 so far, gold remained 28% short of its literal $1,900 high. They attribute its lack of better performance to a stronger U.S. economy, a mightier U.S. dollar, and lack of more physical demand.
This does not mean that the analysts at Macquarie predict gold will fall from its current levels. They are still bullish on the future prices. Instead they claim, “Our expectations for these suggest slow appreciation for the gold price is more likely than a spike higher.”
Is the U.S. Economy Really Significantly Stronger Today Than in 2011?
The Macquarie analysts’ research pins a lot of their explanation for still tame gold prices on a stronger U.S. dollar and economy. It is hard to argue that the dollar is stronger. This is an objective measurement against its major currency peers. As the chart below shows, the U.S. Dollar index has increased from below 80 in 2011 to over 95 in 2016. This argues that the dollar has definitely gained in value against its major peers over the last five years.
It is worth noting that the dollar index is actually down from its five year high of around 100 that it notched at several points in 2015. This makes the argument that the dollar is stronger relative to 2011 valid but not compared to much of 2015.
You could say the same for the U.S. economy as a whole. GDP growth in 2011 came in at plus 1.7%. Yet so far for 2016, the first two quarters have the country’s GDP up .9%. Even when you look at the last four quarters of data for the U.S. GDP, you still only get an annualized growth of 1.2% since mid 2015. By this most important measure of the U.S. economy, the growth actually remained greater in 2011 and 2012 than it has for 2016.
Yet the Macquarie Research analysts still maintain that “The macroeconomic backdrop is less supportive, and this boils down to the fact the U.S. economy and economic outlook is not in the same dire straits that it was in 2011.”
They are basing much of their argument for a solid U.S. economic recovery being underway on the rising value of the dollar and increase in real bond yields. They claim that today’s real interest rates and dollar level show a greater amount of confidence in the U.S. economy than in either 2011 or 2012. It all depends on which economic statistics you look at and versus what year as to whether or not this is actually the case.
Is Physical Gold Demand Really Down?
The other argument that the Macquarie Research team made for why gold prices have not appreciated as greatly as they should is that the holdings of exchange traded funds and physical gold have not increased sufficiently. They admit that the stocks have grown by record or near record amounts for 2016 at the same time. A look at the World Gold Council data shows that first half of 2016 investment demand of 1,064 tons beat the previous record set in the first half of 2009 at 917 tons. ETF Gold demand for 2016 first half of 579 tons almost equaled the entire year demand for 2009 of 645 tons and vastly surpassed 2011 and 2012’s full year totals. Total H1 2016 demand reached 2,335 tons, which is the second highest first half demand on record.
All of this means that Macquarie Research analysts have looked at the economic data in particular ways to make this case for why gold is lower than the 2011 highs. In fact the price should be closer to those highs and it will likely move that way over time so long as gold demand remains strong and economic uncertainty persists. Do not let anyone talk you out of your gold retirement and physical holdings in the meanwhile.
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