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Wall Street Analysts Change Their Tune on Gold – Missing the First $200 Move in Early 2016
Last December 17, 2015, the London pm gold fix was $1049.40, gold’s lowest level in over six years. That was the day after the Federal Reserve announced a 0.25% increase in their key short-term interest rate. At the same time, the Fed indicated that they might raise rates another four times in 2016. At about the same time, several major Wall Street firms were issuing their 2016 forecasts for gold and other investments. Their negative outlook for the future of gold in 2016 was almost unanimous.
Here are some examples of what some major banks predicted (in mid-December 2015) for gold in 2016:
Goldman Sachs said “we maintain our $1,000 per ounce gold price forecast over the next 12 months.”
Bank of America Merrill Lynch said “there are still good reasons to be bearish on gold, at least in the first half of the year.” They predicted a drop to $950 gold in the first quarter.
Citicorp predicted that “investors may continue to reduce gold exposure and look for returns in equities and bond markets.” They predicted an average price of $995 in 2016, rising to just $1025 in 2017
Turning to Europe, some major banks across the pond were also bearish on gold:
Deutsche Bank expected a fall to $980 in late 2016 and an average price of $1033 for the year.
ABN AMRO expected gold drop to $900 in 2016, saying “A rise in U.S. Treasury yields should push gold prices towards $900 per ounce or even below in 2016” due to “investor position liquidation.”
From looking at their forecasts over the years, it is hard to avoid the conclusion that established banks are trend followers – predicting lower gold prices when it is falling and then predicting higher prices when it is rising. This year, after gold rose from $1050 in mid-December to over $1250 in mid-February, some banks issued an “about face” and turned bullish. True to form, they became bullish – after gold had risen.
The Latest (Mid-February) Mainstream Gold Projections
Here are a few examples of big banks turning bullish on gold after it had already risen $200:
The Dutch bank ABN AMRO switched their year-end 2016 target from $900 to $1,300! ABN analyst Georgette Boel wrote, “Having been long-standing bears, we have now turned bullish on precious metal prices,” explaining that “our new scenario sees a longer period of weaker global growth,” adding that “The change in our macro, central banks and FX views [mean] we expect gold prices to rally to $1,300.”
Here’s a dramatic chart from Bloomberg showing ABN’s change of heart in the precious metals this year:
The other European gold-bear cited above, Germany’s Deutsche Bank, which had expected an average $1033 gold price for the year, now sees the end of the long commodity bear market coming soon. They predict mines will close, curtailing supply. “It may take a little longer for capital constraints to become apparent, but as they do, metal price deflation will quickly turn to inflation,” they wrote in mid-February.
In other words, the cure for low prices – as we’ve often said – is low prices: New supplies from marginal mining operations will dry up as those mines close, followed by a rise in demand creating a supply pinch.
In addition, France’s Credit Agricole now projects gold to be $1,250 at the end of 2016 and $1,320 at the end of 2017. Now that interest rates are below zero in Japan and most nations in Europe, Credit Agricole says, “currency debasement fears will remain an important factor in keeping precious metals in demand.”
Most banks are practicing what they preach: They are buying gold. The inflows into gold-backed ETFs has risen 154 metric tons so far in 2016, wiping out the net outflows from gold-backed ETFs in 2015 (138 metric tons). As a result of this buying, gold just hit a 12-month high in U.S. dollar terms – at over $1250 per ounce on February 11 – and a 10-month high in euro terms at €1,120 per troy ounce at the same time.
Germany’s Commerzbank (which has been more consistently bullish on gold in recent years) explains that gold is “in demand in the current market environment, characterized as it continues to be by high levels of uncertainty. There is also central bank buying. In January, “Russian and Chinese central banks bought 13.6 and 16 tons of gold respectively – both are therefore continuing their gold purchases…”
Japan’s move to negative interest rates on January 29 – combined with sub-zero rates in most of Europe – has given gold an advantage in terms of total returns. Nobody can say “gold doesn’t offer income on your deposit” when $6 trillion remains in global banks these days earning a guaranteed loss of one’s principal!
Gold’s decline was based on the assumption that the Federal Reserve would continue raising rates after their December 16 boost. This will likely not happen, with rates in other major currencies falling below zero. This realization has finally convinced traders that gold is a superior hedge against deflation.
This Bloomberg chart compares the total return in four major asset classes in 2016 (through February 19):
Oil has rallied somewhat but it is still deeply depressed from its 2014 peak of more than $100 per barrel, but the CRB raw industrials spot price has now risen 6% since it bottomed last year on November 23.
The trade-weighted dollar has declined about 2% in the last month. Most of that was due to an unexpected rally in the Japanese yen – even while the Bank of Japan was trying to weaken the yen – along with a rally in the euro, up to $1.11 on February 20 vs. $1.05 last November. But the fact that gold set new highs in both the dollar and euro says this is a gold rally – not just a currency move, one way or the other.
As always, we recommend investors accumulate gold regularly – no matter the current price – ignoring the ups and downs of the market as well as the inevitable ups and downs of the gold analysts’ forecasts.