Is the Mania Over or Is $5,000 a Realistic Target?
It has been an incredible year for gold (GCZ25), and prices have been rising to fresh record highs, topping $4,000 per ounce. While most brokerages were bullish on the precious metal, the rally has taken most, if not all, by surprise, and in hindsight, analysts were quite frugal with their targets.
However, analysts have been gradually raising gold’s forecast, and Bank of America expects prices to rise to $5,000 per ounce in 2026. That number now looks like the holy grail for gold after prices have comfortably breached the $4,000 level. Meanwhile, even as the gold mania continues, there are sane voices of caution from some, and Deutsche Bank has warned that prices might have peaked and may lose momentum.
While other asset classes like stocks, bonds, and real estate have several set valuation benchmarks, it’s not easy to arrive at a forecast for gold prices, as it is neither income-generating nor do we have any real comp set.
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However, there are some indicators that we can track to get a sense of gold prices. Here are some of these.
Gold-to-Oil Ratio: There has been a massive divergence between gold and oil prices over the last year, and while oil prices have languished, gold has surged to record highs. As a result, the gold-to-oil ratio has risen above its historical averages, which could mean that either gold needs to fall or oil prices need to rise for the ratio to move towards its historical averages.
Gold Price Versus Production Costs: The average global all-in sustaining costs (AISC) for gold miners is $1,600 per ounce, which means that the current gold prices are over 2.6x the metric, which is higher than historical averages. In theory, a higher ratio pushes miners to increase production, particularly from their lower-tier mines that have higher unit production costs but are profitable at higher gold prices.
Dow Jones to Gold Multiple: It’s an intuitive multiple that captures stock market performance versus gold. The multiple peaks occur during the periods of stock market tops and bottoms when markets fall. The current multiple is around 11x, which is lower than what we have seen of late and signals gold being expensive as compared to stocks.
While none of these multiples gives us a complete picture, it would be safe to conclude that gold prices look relatively elevated now compared to other assets.
That said, there are several bullish drivers for gold prices. In fact, the macro environment has never been as favorable for the yellow metal in recent years. Firstly, while the U.S. stock markets have been strong, there are fears about a bubble, and many investors are hedging their positions by investing in either digital assets or precious metals like gold, thereby bidding up their prices.
It’s not only retail investors but also institutions and global central banks that are increasing their exposure to gold. Central banks have incidentally been on a gold-buying spree amid the de-dollarization drive and have been increasing the share of gold in their reserves at the cost of the greenback.
The massive increase in U.S. debt and the unsustainable fiscal deficit cost the world’s largest economy its top credit rating earlier this year, and while rising stock markets might mask the economy’s precarious finances, they appear to be reflected in gold prices.
Then we have the fragile global geopolitical situation, which is leading to a pivot towards gold. Trade tensions, particularly between the U.S. and China, the world’s two largest economies in that order, are also increasing gold’s appeal given its status as a safe-haven asset. The continued U.S. government shutdown and fears of a recession/stagflation are only adding to the safe-haven demand.
High interest rates were a headwind for gold prices, but the Fed began its rate cuts in September and has indicated more cuts by the end of this year. Lower interest rates are theoretically positive for gold, which is a non-interest-bearing asset and therefore loses out to interest-bearing assets in periods of high interest rates.
I feel hard-pressed to think of factors that are negative for gold, beyond perhaps a de-escalation in trade and geopolitical tensions and a revival in the U.S. and global economy amid the near-synchronized monetary policy easing by global central banks.
That said, I am now in the camp that’s circumspect on gold’s short-term outlook following the recent rally and capitalized on the rally to book some profits. While prices might still rise from these levels, I find it more of a FOMO trade, which more often than not doesn’t end well for those late to the party.
On the date of publication, Mohit Oberoi did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
