By Dr. Thorsten Polleit

There is this humorous saying: “It walks like a duck, it sounds like a duck, and it walks like a duck. Maybe it is a duck?” The prices of gold and silver have gone up quite substantially since June, with gold for the first time since 2013 trading at around 1.500 USD/oz; silver trades close to 17 USD/oz. Where do we go from here? The rise in the price of gold appears to be a “catch up” price movement. Gold has been trading at what appears to be a discount for quite a while. As we pointed out in our Degussa Market Report on 25 April 2019, at that time, the fair price of gold would have been around 1.500 USD/oz.1 We now consider it necessary to raise this estimate.

Many factors are now in place that suggest an ongoing increase in the demand for gold, which should translate into higher prices going forward. Consider the confrontation between the US and China potentially having negative consequences for the world economy; it could prove to be lethal to the current business cycle. Most importantly, however, monetary policies around the world appear to be more than ever obsessed with bringing down market interest rates. The European Central Bank (ECB) is about to push euro interest rates even further into negative territory, perhaps as early as September.

By cutting the Federal Funds Rate in July, the US Federal Reserve has heralded a new easing cycle. In Japan, market interest rates are already creeping along the zero line, and even China’s next monetary policy move might soon bring lower credit costs. With the world’s interest rates heading to zero or even below zero, official currencies can no longer be viewed as a reliable store of value. With market interest rates at or below zero, and consumer and asset price inflation continuing, cash and liquid bank deposits will lose their purchasing power. This means that monetary policies cut down on the number of secure and liquid assets available for private and institutional investors.

We think that this development will almost certainly cause the structural demand for gold in the portfolios of private and institutional investors to increase. This, in turn, is most likely a major force that will boost the price of gold in the months ahead. As you will see on page 3, we nudged our price estimate for gold up to around 1.690 USD/oz towards the end of 2020, with the silver price expected to move towards 23 USD/oz. Of course, the usual caveats apply: Any forecast, especially for precious metal prices, comes with a great deal of uncertainty. However, we are convinced that our price estimates will most likely turn out to be fairly conservative.

We identified a more or less stable long-standing relationship between the gold price and various determining factors. Subsequently, we assumed that the (world) monetary supply will continue to move along the expansion trajectory observed over the past years, while assuming that interest rates and credit costs will remain at current levels. That said, we feel that the inevitably inherent “error” of such an estimate is most likely on the downside, meaning that precious metal prices might well turn out to be somewhat higher, or in the case of an escalating crisis significantly higher than predicted.

Against this backdrop, we feel comfortable to encourage investors to keep their gold and silver holdings or even increase them further at current prices. We do not only think that there is an attractive upward price potential for gold and silver, but we also think that these monetary metals are a natural substitute for time- and savings deposits held with banks. Finally, the savvy and long-term oriented investor should keep in mind that gold and silver cannot be debased by monetary policies, and that they also do not carry a default risk as bank deposits and short-term debt paper do.

15 Aug 2019

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