LAWRIE WILLIAMS: Gold – Scenarios from $700 to $5,000

I’m currently suffering from information overload, with three must-read reports hitting my desk over the weekend – and one of them -- the excellent In Gold We Trust annual review of the gold sector by Ronni Stoeferle and Mark Valek runs to 169 pages! Click here to download the English version – it is also available in German: Extended Version - english (169 pages)There is also a ‘compact version – 29 pages long – and the link to that is here .

Stoeferle and Valek ascribe to the Austrian School of Economics which tends to advocate hard money and gold in particular, so the report is largely gold positive but is packed full of data and charts from which the authors draw their conclusions.  They are bullish on gold, but not enormously so, coming up with some well balanced assessments.

What they describe as the key topics and takeaways of the report are as follows:

  • High expectations of Trump's growth policy dampened the gold price increase in 2016 – Still up 8.5% in 2016 and 10.2% since Jan. 2017
  • The further development of the normalization of monetary policy in the US will be the litmus test for the US economy.
  • Bitcoin: Digital gold or fool's gold?
  • White, Gray and Black Swans and their consequences for the gold price
  • Exclusive Interview with Dr. Judy Shelton (Economic advisor to Donald Trump) about a possible remonetisation of gold
  • 5 Reasons why the gold bull market will continue

On price they come up with four scenarios, out of which they expect the third and fourth to be the most likely outcome:

Scenario A: “Relatively strong real economic growth” The proposed economic policy initiatives are implemented and take hold, the US economy begins to grow strongly (>3% p.a.) and price inflation remains in an acceptable range (<3%). Monetary policy normalization succeeds. The central bank's “experiment” pays off. The gold price should trade in a range from USD 700 to USD 1,000 Scenario B: “Muddling through continues” Real US GDP growth and consumer price inflation remain in a range of 1-3% p.a. In this case we would not expect the gold price to enter into the second phase of the secular bull market we currently anticipate. The gold price should remain in a range from USD 1,000 to USD 1,400 in this scenario. Scenario C: “High inflationary growth” Trump's economic policy initiatives are put into place, a large infrastructure spending program is launched, US economic growth accelerates significantly (>3% p.a.), but so does the consumer price inflation rate (>3%). Monetary policy normalization succeeds. The central bank's “experiment” pays off. The gold price should trade in a range from USD 700 to USD 1,000

Scenario B: “Muddling through continues” Real US GDP growth and consumer price inflation remain in a range of 1-3% p.a. In this case we would not expect the gold price to enter into the second phase of the secular bull market we currently anticipate. The gold price should remain in a range from USD 1,000 to USD 1,400 in this scenario.

Scenario C: “High inflationary growth” Trump's economic policy initiatives are put into place, a large infrastructure spending program is launched, US economic growth accelerates significantly (>3% p.a.), but so does the consumer price inflation rate (>3%). Monetary policy normalization succeeds only partially, as real interest rates remain very low or even negative, due to the elevated consumer price inflation rate. In this scenario, the gold price should trade in a range from around USD 1,400 to USD 2,300.

Scenario D:  Recession, stagflation and/or significant weakness in the US dollar push the gold price up noticeably. In the wake of another US recession and the cessation of the monetary policy normalization effort, significant changes to the global monetary order cannot be ruled out. A very large gold price rally has to be expected in such an environment. Gold prices between USD 1,800 up to USD 5,000 appear possible in this scenario.

Well all bets are hedged in the above, but the report’s authors anticipate C and D to be the most likely outcomes here although no timescale for this to occur has been predicted.  The Scenarios will be very much event driven by U.S. economic performance and/or what they describe as black swan or grey swan events elsewhere.   They do foresee a looming U.S. recession as ‘inevitable’.

 A year ago they were predicting gold at $2,300 by the end of June 2018, but the yellow metal’s poor performance in H2 2016 has led them to believe that this level is now not achievable on this timescale.

They also note that if the bull market in precious metals continues, the performance of mining stocks will be decidedly positive.

While the full report may be a little indigestible for all but the most committed gold market analysts we do recommend downloading, and reading, the compact version.  Enjoy!

05 Jun 2017

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com