We have already witnessed one of the quickest and swiftest turnarounds in the history of modern finance and its name is gold. Only four months ago, after the Fed had hiked in December, gold bullion was breaking below US$1100/oz and forecasts for sub-US$1000/oz prices in 2016 were rife.
Since then gold in USD has rallied from its low point of US$1050/oz to the mid-US$1200/oz, turning it into one of the best performing assets in Q1 2016. In my opinion, all the world's gold bugs should send Janet Yellen a Christmas card in December. Always nice to say thank you even if this was never what Yellen & Co had in mind.
If US bond futures are correct and CBA's revised slower for longer might not cut the mustard in a slow growth with lots of risks environment, then surely there's more to come for gold bullion. But how much exactly?
As per always, it's very difficult to obtain an impartial view on gold's outlook. One either has to rely on devoted gold bugs whose reasoning doesn't always stack up, and neither their calculations, but their focus remains without exception always on blue sky highs in the stratosphere, or one has to rely on predictions and assumptions by investment bankers who by default hate/dislike gold for what it stands for is anti-establishment, and this includes the rich and filthy rich on Wall Street (and all their loyal servants).
This is why a February update on bullion by National Bank Financial Markets in Canada deserves to be praised and highlighted because it tries to cut through all the sentiment and noise by simply outlining gold's major price drivers and their potential impact this year. Forecasting, as per always, is more art than science, but it pays to take note from forecasters who conduct their task as if it were science and then treat it as an art while wearing the hat of an investor.
The four major drivers for gold are, according to NBF's assessment:
- the US dollar
- stock market volatility
- real interest rates
- inflation
NBF analysts have build a model around these four inputs. The model predicts that were equity markets to experience a 2011-type of turmoil/weakness, this would allow gold bullion to gain around US$162/oz. If somehow things turn out worse, a la 2008, NBF assumes central bankers will be quicker to act this time, but gold bullion would still gain some US$330/oz.
When the report was released, in mid-February, gold bullion was priced around the same level as where it trades today. Hence both predictions can still be taken as guidance, respectively implying 13% and 26% in potential gains from owning gold in USD.
Recent revelations by the US military have shown the late Osama bin Laden was a gold bug, with correspondence prior to his death including predictions of bullion priced at US$3000/oz. For those predictions to come through, we'd have to assume much darker scenarios like negative interest rates in the US and potentially a significant loss of confidence in central bankers' abilities.
While certainly not impossible, I would not necessarily be in favour of hinging one's investment strategy on such a dark outcome for the year(s) ahead, but as an insurance policy against further mayhem and sudden hiccups in the economic trajectory and otherwise, I think gold is back as a natural hedge/insurance policy.
As such I believe it should be on every investor's radar.
