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Current Gold Price Levels Not Considered 'Cheap,' Further Losses Possible – Deutsche Bank

By Kitco News
Wednesday October 1, 2014 9:35 AM

(Kitco News) - Gold prices are hovering in the low $1,200-an-ounce area, but current values may still be pricey compared to valuations against other physical and financial assets, said Deutsche Bank on Wednesday.

Further, with the prospect of further gains in the U.S. dollar, Standard & Poor’s 500 and long-term real interest yields, “additional downside for gold prices seem inevitable,” the bank said in a research note.

Deutsche Bank looked at what would be the fair value of gold against several metrics, including in real terms against the producer and consumer price index, relative to per capita income, the S&P 500, copper and crude oil. The average price of gold versus those six metrics was $941 an ounce, with the lowest price coming in against PPI real terms - $725 – and the highest against crude oil, $1,400.

“Even at $1,200/oz, gold prices cannot be considered cheap. As a result we would not view current price levels as offering much support in the face of further advances in the U.S. dollar, long-term real interest rates and the U.S. equity risk premium,” they said.

The bank said since it considers the current rally in the U.S. dollar to be a bull-market cycle, and the greatest headwind for gold because of the diverging central bank policies between the Federal Reserve and the European Central Bank.
“Of the financial forces we track in assessing prospects for the precious metals complex, we believe the U.S. dollar poses the greatest risk given the durable nature of U.S. dollar strength over coming years,” they said.

Deutsche Bank said since 1973 when currencies were allowed to float, the U.S. dollar had experienced long cycles of rising and falling. On average, they said, U.S. bull-market cycles last around six years from bottom to top, and the greenback generally rises 34%.

“Since the current rally began in July 2011 and the U.S. dollar trade-weight index has strengthened by approximately 18% over this period, one can consider that we are only half way through the current cycle,” they said.

The bank also said since equity market participants are confident that any rise in U.S. interest rates won’t harm economic growth, this has allowed the S&P 500 to hit record highs.

Weaker gold prices will have implications for North American gold producers, they said, and they estimate the miners need a $1,200 gold price to remain cash-flow neutral on production.

Silver/Gold Ratio ‘Inconsistent’

The German bank said the sharp fall in silver prices relative to gold, which has pushed the gold:silver ratio to its highest level since August 2010, doesn’t line up with increased business confidence.

“In our view, silver’s relatively poor performance is inconsistent with the acceleration in U.S. business confidence. Indeed in environments where U.S. business confidence is above 50 and rising typically are associated with the outperformance of silver relative to gold,” they said.

However, they said, the outlook for silver may be changing. Silver-backed exchange-traded funds saw net inflows of just over 400 metric tons in the third quarter, whereas speculative futures and options net-long positioning on the Comex is down 80% during the same timeframe.

“Since the speculative community has only held a net short position once over the past decade, we believe a more supportive positioning environment is emerging for silver, particular in the event that U.S. growth indicators continue to improve,” they said.

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By Debbie Carlson of Kitco News; dcarlson@kitco.com
Follow me on Twitter @dcarlsonkitco



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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