ETF Securities Research Blog

Is there much upside to the Gold price?

Gold has rallied 14% year-to-date for many reasons, the primary being general uncertainty surrounding monetary policy, particularly the timing of the US Federal Reserve’s (FED’s) rate hikes and the impact of negative central bank rates in Europe. Politics in the US and risks of a Brexit have probably helped support the price too. Inflows into gold investments, according to our data, are the highest since January 2009 when the collapse of Lehman Brothers prompted the FED to engage in aggressive quantitative easing.

Our expectations were for mid-teens appreciation in the gold price for the full year 2016, and now that we have witnessed this, is there much upside to the gold price?

Whilst we don’t publish price targets for gold, we have developed a model that gives guidance on this notoriously difficult-to-forecast precious metal. We have found that fund flows, the VIX (CBOE volatility index) and supply/demand data don’t really help with understanding what the fundamental gold price should be. But there are four factors that do, namely its inverse relationship with the USD and nominal treasury yields, and its positive relationship to inflation and CFTC futures positioning.

Plugging the weakness of the US dollar (probably due to monetary policy expectations/fears) and the stronger than expected inflation data into the model suggests gold at $1200 in January 2017, around its current price, is fairly valued.

But what if we assume sentiment for gold substantially increases? Net CFTC futures positions rose to 200k when the Greek crisis erupted in early 2012, well above the long-term median of 75k. It’s not inconceivable to see a Brexit scenario or a non-establishment candidate being elected in the US pushing sentiment to similar highs – if either were to occur the model suggests gold price to reach $1400.