Is gold expensive? Some people think it is still very cheap!
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It is psychologically hard to invest in gold at $2,300-$2,400 per troy ounce. After all, a year ago, no one wanted to buy it even at $2000. It also didn't seem like a very wise investment. But what if we look at the situation from the other side?
In a report published last week, David Rosenberg, founder of Rosenberg Research, said that even at these high prices, gold still has a lot of upside potential, and now is the time to increase the weight of this asset in your investment portfolio.
"Any well-diversified portfolio should contain gold and we currently recommend aggressive overweighting. This will serve as a hedge against geopolitical and fiscal risks, provide a safe haven in case a bullish rally in equities is derailed, as well as providing a positive view on the upcoming easing cycle and period of dollar weakness. Don't be afraid to buy gold at current prices," Rosenberg said in the report.
According to the expert, under current conditions, his base scenario is for gold to reach the level of $2,500 per ounce. He added that any number of catalysts could even push prices to $3,000 an ounce. "The bullish outlook comes amid gold prices holding steady above $2,350 an ounce.
Rosenberg noted that gold is not only outperforming the S&P 500, but is gaining ground in what has traditionally been a difficult environment.
"The rise in gold prices has occurred during a period of a stronger dollar, lower inflation expectations, and a period when the Fed has shifted market expectations towards 'higher and longer.' All of these events usually have a negative impact on the gold price, but it has continued to rise," he said.
However, he added that the broader gold market is not just focused on macroeconomic conditions in the US. Rosenberg noted that gold has risen significantly against all major world currencies.
Rosenberg said the biggest factor supporting gold prices remains active central bank purchases as countries diversify away from over-reliance on the US dollar. China's central bank has been the dominant buyer of gold over the past two years and has bought gold for 17 consecutive months.
At the same time, emerging markets are seeing strong physical demand from retail investors looking to protect their wealth and purchasing power. Finally, Rosenberg noted that gold continues to be a favourable asset as economic risks and geopolitical uncertainty dominate global financial markets.
While gold has largely ignored the threat of the U.S. Federal Reserve holding interest rates at restrictive levels longer than expected, Rosenberg said he expects traditional correlations to emerge when the Federal Reserve begins to cut interest rates.
Rosenberg's team has developed a comprehensive gold market model. In the first scenario, where the U.S. economy avoids recession, Rosenberg sees a 10 per cent rise in gold prices when the central bank starts cutting interest rates. Under this model, interest rates exceed post-2008 financial crisis levels.
At the same time, if a recession does occur, leading interest rates to fall to the average levels seen over the past decade, Rosenberg sees a 15 per cent rise in gold prices.
"Combining these observations with our modelling calculations, we can conclude that the downside risk to the gold price is limited, but there is still plenty of room for upside," he said.
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