LAWRIE WILLIAMS: Gold price outlook - $1,374 year-end - Murenbeeld
We’ve always rated Martin Murenbeeld’s approach to gold price forecasting as one of the best and most likely to be accurate out there, and his latest Gold Monitor newsletter brings us his revised Q2 update – shown here:
As can be seen he takes three scenarios – a bearish case to which he gives a 10% likelihood weighting, a base-price (55-75%) and a bullish one (15-35%) and then comes up with a weighted average which he adjusts upwards a little for possible geopolitical and/or financial crises. As one can see from the above table he comes out more on the bullish side for the gold price this year giving a particularly low weighting to his most negative scenario – and sees the gold price doing even better in 2020 – but his assessment can still be seen as being only ‘cautiously optimistic’ looking for a year end price of only around $1,374 and a 2019 average price of $1,331.
The newsletter explains the basis of the three scenarios in a little more depth: The assumptions that drive each scenario are noted as being quite varied; in Scenario A the U.S. dollar continues to rise from current levels, for example, and inflation-adjusted interest rates also continue to rise. The opposite is assumed for Scenario C. Central bank gold demand is also contrasted across the scenarios, etc. The objective of the exercise is to provide plausible price scenarios for gold, based on plausible global financial and economic developments the newsletter states.
With a number of bank analysts having gone on record as suggesting a $1,400 year-end price, or higher, Murenbeeld’s assessment is definitely conservative by comparison, but with gold so far failing to manage to stay above $1,300 for any length of time despite the U.S. Fed initially intimating no interest rate rises this year and a possibly falling dollar (President Trump has gone on record as considering the dollar index is too high), one should certainly not dismiss such a cautious approach. Gold has failed to react as positively as expected for the past couple of years and 2019 could well prove to end up with a similar price pattern.
Delving into the latest Gold Monitor, which sets out the reasoning behind the updated figures, we note that Murenbeeld and his colleagues view the latest Fed statement following the recent FOMC meeting, as perhaps suggesting that although a rate increase this year is unlikely, it could still happen should improving economic data support this. They picked out the following paragraph in the Fed’s statement as agreeing with this position which maintained that the recent media commentary on the inversion of the yield curve, and its interpretation that the U.S. might be heading for recession, was perhaps an anomaly:
“Several participants expressed concern that the yield curve for Treasury securities was now quite flat and noted that historical evidence suggested that an inverted yield curve could portend economic weakness; however, their discussion also noted that the unusually low level of term premiums in longer-term interest rates made historical relationships a less reliable basis for assessing the implications of the recent behavior of the yield curve.”
On the geopolitical addition the compilers noted that they view the global environment as being volatile, and the U.S. Administration under the Trump Presidency as being somewhat unpredictable which they see as two good reasons to expect sudden flareups in the gold price. They also note that the geopolitical factor is bumped up for 2019-Q4, on account of the new EU extension for the cutoff date for Brexit and the U.K. potentially leaving the EU by the end of October.
While we stand by our own forecast that gold may reach $1,400 or higher by the year end, the yellow metal’s price progress is currently looking a little more vulnerable and the Murenbeeld weighted forecast is perhaps a more measured analysis of the present situation. The newsletter notes that the current charts suggest the likelihood of the dollar rolling over in due course as the U.S. trade balance seems to be worsening in spite of (or perhaps because of) Presdident Trump’s policies supposedly designed to improve the payments balance! Business investment is seen as being weak, despite ample liquidity.
There is also the fact that Central Banks beyond Russia and Kazakhstan have been returning to the gold buying fold – and now we see China reporting monthly increases to its gold reserves. We feel it has probably been doing so all along, but now it is supposedly putting a figure on monthly accumulations. The U.S. dollar is seen as becoming an increasingly less desirable reserve currency given the massive U.S. debt position though, the letter notes, the lack of an alternative currency means dollar usage around the world remains elevated. But this means that some Central Banks may be returning to gold as a reserve asset in the dollar’s place.
The rise in global debt is seen as another important theme when considering future gold prices. The newsletter commentary notes that rising debt erodes economic growth, limits monetary policy options, is a restraining hand on expansionary fiscal policies (which MMT – modern monetary theory – hopes to get around) and makes the financial environment more fragile and prone to crises.
The Murenbeeld analysis is always worth reading. Martin himself is one of the world’s most respected gold analysts with many years of experience behind him. He is much in demand as a speaker at gold conferences and his reasoned gold forecasts are usually among the more accurate and circumspect out there. We would rate him mildly bullish on gold as borne out by this latest set of forecasts.