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Deutsche Bank has meanwhile, upgraded its long-term price forecast for gold to $1,300/oz from $1,025/oz. The Bank has based this new estimate on the economics of gold production, specifically marginal production costs..

11 Apr 2013

Commodity Online
Deutsche Bank has downgraded its gold price forecast for 2013 by 12% to $1,637/oz; this compares with the average 2012 price of $1,669/oz; implying the first down year for gold since 2001. “Our new forecast for 2014 is $1,810/oz, down 5% from our previous estimate.” the Bank said in a report.

Deutsche Bank has meanwhile, upgraded its long-term price forecast for gold to $1,300/oz from $1,025/oz. The Bank has based this new estimate on the economics of gold production, specifically marginal production costs.

“We have estimated that all in cash costs for the 95th percentile of the gold mining industry is around $1,300/oz. We believe that this represents a justifiable long-term price level and we use a similar methodology for the base metals complex and platinum group metals.” Deutsche Bank said in a report.

That the world’s reserve currency is set to strengthen against most other currencies alone poses considerable challenges for gold as an alternative, non-fiat currency and store of value. The apparent stabilisation of US economic growth together with improving employment and housing, has allowed the market to anticipate the withdrawal of Fed monetary support via Quantitative Easing (QE) and ultra-low interest rates.

This creates an additional and powerful counter-weight to gold as the dollar isanticipated to experience fundamental value supports as real rates may be expected to move into positive territory. In essence, gold’s use as a hedge against currency debasement effectively fades.

Finally, conventional assets such as equities are performing well and drawing in capital from competing asset classes. Furthermore, as US equities have performed, the conviction that they will continue to do so has increased significantly.

The weight of this conviction and the apparent disregard for outlying/tail risks, which remain difficultto quantify or predict (Cyprus being a perfect example), suggest that safe-haven, unconventional assets such as gold could remain out of favour.

On the back of the above factors the gold price has retreated over the quarter by around $125/oz, now trading near the $1,550/oz level.

“Given our FX strategists expectations for continued strength in the US dollar and our US economist’s forecasts for an acceleration in GDP growth going forward, we expect that gold will struggle to appreciate meaningfully against the USD. Versus other currencies of course, the outcome could be quite the opposite (JPY for example) as the central banks in many other jurisdictions appear to be very much biased towards continued balance sheet expansion,” Bank report said.

The German Bank expects that gold prices will languish, at least in the near-term if global growth struggles to maintain its present rate of expansion. Without central bank intervention this could create deflationary and or liquidity fears which also put pressure on gold prices (again, particularly in USD terms).

The recent ‘risk-off’ environment during the first week of April – as growth fears increased following some disappointing US real economy data – coincided with gold weakness, suggesting that the velocity of money could remain a constraint in gold’s future performance.


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