Gold price wobbles, but Deutsche Bank sticks to its $1,700 forecast

New York (Aug 30)  This year’s investment darling, gold, is finding that investors are a fickle bunch. It’s heading for one of the longest wilting streaks since May – a five-day fall.

And why? Well, Federal Reserve chair Janet Yellen said last week that the case for a US rate increase has strengthened. Yellen comments hit gold as rate-futures re-price

And the markets are going with her.

The odds of a September rate rise have risen to 42%, from 22% a week ago, according to Bloomberg. The odds of a December hike are now 65%.

Higher US rates make the oldest haven less attractive in two ways. Or so the theory goes. Inflation is curbed, so its hedging properties are less in demand. Higher rates should also mean higher yields. And gold famously yields nothing.

So far so bad. And yet Deutsche Bank’s commodity team is sticking with its view that gold should be worth $1,700 an ounce.

Analysts Michael Hsueh and Grant Sporre argue that the balance sheets of the main four central banks (the US, China, Japan, eurozone) have expanded by 300% since the beginning of 2005.

But are US rates what they used to be for the metal?

This may matter more than US rates.

“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 it should be trading closer to $1,700 an ounce,” the analysts write.

All up, there is some comfort for gold bugs here.

“Our conclusion however is that as long as the central banks’ balance sheets continue to expand, the gold price should maintain some momentum,” the Deutsche analysts write.

Even if the Fed does raise interest rates once, other central banks are nowhere near doing do.

The Bank of Japan, the European Central Bank, the People’s Bank of China and the Bank of England will all undertake further stimulus, analysts think. In Australia and New Zealand rates are expected to inch lower. And they are at record lows already.

If Deutsche is right, then a Fed move will see the precious metal struggle. But a major selloff is unlikely.

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Source: NewsMarkets