Historic price patterns for gold reveal that the price is mainly pegged to the economic framework conditions of the USA over the long term. Historically, three price drivers in the form of developments related to a) interest rates b) the rate of inflation and c) the U.S. dollar stand out. However, gold works more as a barometer of anxiety. The last upturn, which lasted until 2013, was supported both by the global financial crisis and the European debt crisis.
In our baseline scenario (weighting: 60%), we expect the U.S. economy to develop robustly over the next few years, featuring a moderate level of inflation (Goldilocks conditions). This means that, should there be a continuation of interest rate normalisation, the real interest level will increase. In the past, this has always had a detrimental effect on the price of gold. However, in our opinion an interest rate turnaround is also imminent in Europe, which in turn should provoke a debate about opportunity costs of owning gold. Furthermore, we assume that over the next few years there will be no repetition of the systemic insecurity seen during the financial crisis and the European debt crisis. This is in our view indicated by the positive global economic outlook and ability/willingness to trade on the part of central banks. Our baseline scenario suggests that the price of gold will fall to USD 1,000 over the next three years.
However, there is also the risk that Trump could cause the U.S. economy to overheat through excessive fiscal policy measures. The rate of inflation would then rise more steeply than in our baseline scenario. Against this background (of falling real interest rates), gold may initially benefit. Nevertheless, higher interest rates would likely also precipitate a more restrictive approach from the Fed, further limiting the gold fantasy. Our alternative scenario (20%) suggests a gold price of USD 1,200.
Due to the various political risks, we have also developed a risk scenario (20%). Should, for example, the populist (Eurosceptic) parties gain increased influence, the future viability of the EU would be subject to further scrutiny. This would have a correspondingly negative effect on economic development and slow interest rate normalisation. Furthermore, there are global geostrategic risks to consider. In this context, the political elite in Turkey and Russia are providing cause for concern. President Trump’s comments are also explosive at times in terms of their effect on foreign policy and trade. A gold price of USD 1,700 is possible in our risk scenario.
In summary, current weightings suggest that an expected value of USD 1,180 is likely. We therefore see no point in investors buying gold over the next three years. However, should investors seek to acquire gold more keenly on account of its suitability for hedging and select other weightings (e.g. increased likelihood of risk scenarios actually happening), gold as a constituent portfolio item could make sense.