Perceptions of gold have gradually been shifting in recent years away from notions of commodity and toward a view that the metal is money of the highest quality. And, this return to a “traditionally approved monetary status for gold” is indicative of a new phase in the yellow metal’s bull market.
This is the view of Erste Group’s Ronald Stoeferle, who has just released the 2012 edition of his comprehensive gold report entitled: In Gold We Trust.
In it, Stoeferle looks at everything from the metal’s portfolio improvement qualities and its ability to produce emotional arguments to gold mining shares and the decline of the petro dollar. The report covers what Stoeferle believes is gold’s most important characteristic, its high stock to flow ratio and looks at numerous reasons why the metal has performed so well of late and why it is likely to continue upward in the fourth quarter of 2012 and hit $2,300 an ounce before this latest phase of the market concludes.
Among these reasons are the renaissance of gold within international finance and negative real interest rates.
Stoeferle points out that gold has been, over the last two years, gradually becoming “politically correct” again.
“Due to its high liquidity and unique characteristics, gold is becoming ever more prominent as collateral. Therefore, we are currently seeing the renaissance of gold in international finance. The foundation for a return to “sound money” has been laid.”
He adds, “In a US survey, 44% of US citizens declared themselves in favour of returning to the gold standard, with only 28% being strictly opposed to the idea4. Some say that there is not enough existing gold for a gold standard today, but we regard this notion as a distortion of reality. The British Empire flourished under the gold standard, yet operated with only 150-200 tonnes of gold in the safes of the Bank of England. This means that the quantity is not the problem – quality trumps quantity every time.”
Stoeferle further points out that recent proposals by the FDIC, the OCC, and the Federal Reserve with regard to regulatory capital requirements mean that for the first time risk weighting of gold has been set to zero. “Gold is now officially again ‘as good as gold’ and ranks on the same level as cash,” he says, “We expect this decision to have a wide range of implications. For example, the opportunity cost of holding gold will be reduced massively.”
The second major argument for why gold prices are likely to remain high and go higher is that gold performs well in a negative interest rate environment.
As he says, “During the 20 years of the gold bear market in the 1980s and 1990s, the average real interest rate level was around 4%. Real interest rates were negative in only 5.9% of all months. The situation in the 1970s, however, was completely different: real interest rates were negative in 54% of the months. Since 2000 real interest rates have been negative for 51% of the time, which constitutes an optimal environment for gold.”
And, he adds, the fact that the Fed is planning to maintain its zero-interest policy until 2014 should see rates staying negative for a while longer which should create a positive foundation for further increases in the gold price.
But, while these factors fall into what some commentators have dubbed the “fear trade” side of the market, Steoferle is quick to point out that the continued high levels of demand from India and China provide an equally strong foundation for prices.
“Gold has been a time-tested store of value for centuries. The traditionally high affinity for gold and rising net worth will support demand in the long run. Whoever expects incomes in China and India to continue rising and real interest rates to remain negative or low, will by default recognise gold as the beneficiary of this development.”
While he remains bullish for the short to medium term, Stoeferle does acknowledge that certain happenings could see this expected growth in prices falter.
If real interest rates were to rise above at least 3% for a long period of time, we would see gold prices decline, he suggests. They would also fall if the world underwent the severe structural reforms needed to sustainably slash its debts. Likewise an end of further stimulus measures would see the yellow metal fall, as would new extreme values in relation to other asset classes.
A profound recession in China and India could also tarnish gold’s lustre as would a sustainably strong US dollar ut, while these factors shouldn’t be entirely ruled out, Stoeferle doesn’t see much chance of any of them coming to pass in the medium term.
” Given that the majority of debt was neither redeemed nor written off but has only been transferred, the problem of excessive debt has still not been resolved. Fiscal problems cannot be (sustainably) solved with monetary measures. That would be like sorting out a hardware problem with software updates.
“As far as sentiment is concerned, we definitely see no euphoria with respect to gold. Scepticism, fear, and panic are never the final stop of a bull market. Therefore we believe that our long-term price target of USD 2,300/ounce could be on the conservative side… We believe that the parabolic trend phase is still ahead of us, at the end of which our long-term target of USD 2,300 should be reached.”