Bank Of America On Gold’s Imminent Rise To $1,500
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Bank Of America On Gold’s Imminent Rise To $1,500
Earlier we presented one view on why gold is about to plunge. While that perspective was somewhat truncated, a report recently issued by Bank Of America’s commodities team presents the case for gold at $1,500/ounce. As BACMLCFC observes, and agrees with other observations presented on Zero Hedge by both SocGen and by Jim Grant, “[d]uring the last decade we found that three variables alone could explain the fluctuations in the price of gold: risk, currency and commodity prices. In a nutshell, our analysis showed that gold is sometimes a currency, sometimes a commodity and sometimes a store of value. Of course, the elusive question will always be figuring out which market gold will track next.” In essence, a very detailed report (get a cup of coffee now) to confirm that Paulson and Ackman will soon be much richer.
Gold Prices Continue To Move Towards $1,500/oz
The three stages of gold price appreciation
Departing from this analytic framework, we argued back in October 2008 that gold prices would move up to $1500/oz in three steps. The outburst of the credit crisis in August 2007 marked the start of the first stage where gold started to reflect the rising risk premia, rising from $650/oz to about $950/oz. The second stage of gold price appreciation, we argued well over a year ago, would primarily be about USD weakness and lack of confidence in fiat currencies. We argued that gold could break through $1200/oz in this second stage and strengthen against all currency crosses. The third and final stage will be driven, in our view, by a strong cyclical recovery in energy and commodity prices.
A weak dollar is now driving investors into gold
Our analysis shows that the recent rally in gold prices that started in April this year has mainly been about currency weakness, matching the second stage described in our October 2008 piece. Of course, many observers will argue that investor and central bank demand has been the main driver of gold prices for
some time (Chart 2). But this is the old traders’ truism: prices go up because there are more buyers than sellers. The more critical question to understand whether a trend is sustainable is what drives that investor demand. In that sense, gold prices have rallied this year on the back of a weaker trade-weighted
USD (Chart 3).
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