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Bullion “Experts” Miss the Barn in their Gold Price Projections
We have been teasing the Wall Street investment bankers for their overly-bearish predictions on gold for 2016. One after another, they seem to be changing their tune after gold has risen by 18% in the opening quarter so far. In early March, for instance, JP Morgan Chase changed from “underweight” (last year) to “neutral” (in January) and now to “overweight” in gold. In commodities, Morgan’s updated March advice is to “short gas, oil and base metals but overweight gold.” They have upgraded their fourth-quarter average gold price to $1,250 per ounce, which has already been exceeded during the first quarter.
Wall Street can be forgiven for not understanding gold, since stocks and bonds comprise their main beat. But what can you say about the world’s greatest “experts” on gold – the members of the London Bullion Market Association (LBMA)? At the start of each year, these top 31 top bullion firms are polled about their predictions for the precious metals in the New Year. In hindsight, they merely project the previous year’s price trend into the future, but that is not fundamental analysis. It’s more like momentum investing.
Last Year’s Top Predictor Sees Gold Averaging $970 This Year
Last year’s most accurate forecaster for the average gold price in 2015 – Bernard Dahdah of the French investment and bullion bank Natixis – probably won’t win this year’s contest. For 2016, he predicted that gold would drop below $1,000 by March 31 and then average a price of only $970 for the full year.
Dahdah based his bearish prediction on the strength of the dollar. Indeed, the price of gold is largely determined by the dollar trend. In the first half of 2014, when the dollar war fairly flat, gold was strong, averaging nearly $1,300, but when the U.S. dollar index soared 20%, gold fell by a similar amount.
For 2016, Dahdah shared a widespread assumption that the Federal Reserve would raise rates four times in 2016. That would hurt gold, goes the thinking, since gold offers no interest. In a note to his Natixis clients on December 17, the day after the Fed’s first rate increase in a decade, Dahdah wrote that “higher interest rates mean a higher opportunity cost of holding gold.” This will lead to “further outflows” in the gold-backed exchange-traded funds (ETFs). Gold “will be mainly driven by the expected path of interest rate hikes,” he said. As a result of that flawed analysis, Dahdah expects gold to end 2016 at just $950.
Instead, gold ETFs have been responding to a surge in gold ETF buying by purchasing more gold in 2016. These ETFs tend to magnify any gold move on the upside or downside by fueling more sales in a bear market and purchases in a bull market, creating a circle of demand that leverages gold, up or down.
Dahdah also looks mistaken when he said that the problems in China would lower demand there, and that “central bank demand for gold is [also] expected to remain weak” as the emerging economies struggle.
Instead, because of domestic currency pressures, many central banks have continued their gold buying. In January 2016 (the latest month with available statistics), Kazakhstan increased its central bank holdings for the 40th month in a row, while Russia added 700,000 ounces, or 25% above its average month in 2015.
The LBMA’s “Second Draft” is Closer to the Truth, but Still Overly Bearish
On February 3, 2016 (when gold was $1,132), the London Bullion Market Association released a new edition of its 2016 Forecast Survey, with a slightly more bullish tone. In this edition, 36 analysts (representing the same 31 companies), predicted that gold would average $1,103 in 2013. They predicted larger gains in the other precious metals – +12.7% in palladium and +5.4% for both silver and platinum. (The higher rate for palladium and platinum is based on strong demand for auto catalysts in vehicles.)
Barely one week after this forecast was published – on February 11, 2016 – gold rose $51 in one day (basis: London pm setting) to $1,241, so their week-old report already seemed out of touch with reality.
In the updated report, the most bullish forecast was by Joni Teves at the Swiss bank UBS, who forecast an average price of $1,225 in 2016, while Martin Squires at BNP Paribas was the most bearish analyst with an average price of $960. He blamed “slower global growth, strengthening U.S. dollar and the associated expectation of three further U.S. rate hikes this year.” (But, what if there are ZERO 2016 rate hikes?)
These LBMA analysts admittedly don’t look at the physical gold demand as much as the global economic picture, as evidenced by Paribas’ main bearish pillars – slower global growth and a stronger dollar. But it would seem that the gold market does not overly depend on global growth – gold is a far narrower market than stocks, bonds or currencies, so a little buying power can go a long way in the gold markets.
When it comes to gold vs. the dollar, it depends on which paper you use to buy your gold. In 2015, gold rose in terms of most currencies, even as it fell in dollar terms. This year, gold is rising in terms of every currency, since gold’s 18% gain (so far) is far greater than the dollar’s 3.3% decline. Through March 21, 2016, the Wall Street Journal U.S. Dollar Index is down 3.34%, partly on the reduced expectation of the number of rate increases the Fed will attempt this year, but the U.S. dollar is not down sharply against any major currency, implying that the price of gold is up in double-digits so far in 2016 in most currencies.
In the final analysis, these bullion experts aren’t any better than their Wall Street cousins. They tend to take whatever trend is happening in December and merely project that trend into the New Year. Since gold was falling late last year, they predicted a drop in 2016. True analysis isn’t based on price trends. It’s based on fundamental analysis. With interest rates turning negative in Europe and Japan (and very low in America), gold has an advantage over cash in most countries. In the meantime, 2015 was probably a year of peak new gold mining output, due to the closure of so many mines over the last two years. You would think that just one out of 31 bullion experts would recognize this change in gold’s fundamentals.