BofA Global Research has lifted its 18-month gold target price from $2,000 to $3,000/oz as central banks and governments are set to double their balance sheets and fiscal deficits.

 

The research projects an average gold price of $1,695/oz in 2020 and $2,063/oz in 2021.

 

A strong USD backdrop, falling equity market volatility, and weak jewellery demand in India and China may remain headwinds, the research warned.

 

As the ultimate store of value, gold prices have performed well during the past 15 months, posting a rally of over 10% since the Federal Reserve did a monetary policy U-turn in January 2019. Gold has also delivered a strong performance against other asset classes year-to-date. Of course, it has not been a straight line up, and gold did sell off hard for a brief period in March. The swing in gold prices mirrored the down and then up move in real interest rates. 

 

"Now our CTA models suggest gold positioning is light, likely because of the spike in volatility and the mechanical drop in the gold Sharpe ratio. But this constraint could change as volatility keeps falling quickly across financial markets," says the BofA Global Research.

 

Due to the Covid-19 lockdowns, US GDP could go down by 30% YoY in 2Q20, the steepest drop in modern history. Other countries like Japan will likely experience a 21.8% decline in output in 2Q20, while China just reported a contraction of 6.8% in 1Q20. As central banks rush to expand their balance sheets and backstop asset values and consumer prices, a lot of risks could end up being socialized. The size of major central bank balance sheets has been stable at around 25% of GDP for the last decade or so, just like the gold price. As economic output contracts sharply, fiscal outlays surge, and central bank balance sheets double, fiat currencies could come under pressure. And investors will aim for gold, says the research. 

 

"True, a strong USD backdrop, reduced financial market volatility, and lower jewellery demand in India and China could remain headwinds for gold. But beyond traditional gold supply and demand fundamentals, financial repression is back on an extraordinary scale. Rates in the US and most G-10 economies will likely be at or below zero for a very long period of time as central banks attempt to push inflation back above their targets. Beyond real rates, variables such as nominal GDP, central bank balance sheets, or official gold reserves will remain the key determinants of gold prices, in our view. As central banks and governments double their balance sheets and fiscal deficits respectively, we have also decided to up our 18m gold target from $2,000 to $3,000/oz," said the BofA Global Research. - TradeArabia News Service