Chris Wood, global head of equity strategy at Jefferies, has turned even more bullish on the precious yellow metal gold and sees it to scale to $5500 per oz, which is almost 180% higher than its current trending price level. Earlier, he expected the metal to hit a price of $4200 per ounce.
While making the earlier estimate, Wood in his weekly note to investors said greed and fear was based on adjusting the gold price for US per capita disposable income that was deployed into the precious metal when the price hit an high of $850/oz during the last bull run in January 1980.
"Gold price was then equivalent to 9.9 per cent of US disposable income per capita which was $8,547. The gold price is now $1,952, or 3.6 per cent of per capita US disposable income of $53,747. To reach 9.9 per cent of US disposable income per capita means gold should rise to $5,345. This means that a price of $5,500 is now a reasonable price target at the peak of the current secular bull market," he debates.
Other Brokerages Too Have Similar Forecast On Gold As Chris Wood
In fact Chris' estimates on gold is shared by other global brokerages, say for instance, BofA Securities Fund Manager Survey (FMS) for August brings to light that maintaining long positions in gold has been the second-most sought after trade among global fund managers and among those surveyed 23% are having bullish outlook on the precious yellow metal.
Credit Suisse Wealth Management also opines that in the long run gold will further trend higher in price and currently gold's run up is largely on account of softer US dollar as well as lower real yields "Covid-19-linked concerns are still present as the pandemic keeps accelerating in various parts of the world, which keeps the diversification demand high for gold. This is visible in strong ETF inflows, which have again reached a new record of 109 million ounces, showing no signs of abating. With the prospect of a weaker US dollar and a low-interest rate environment, our House View remains positive on gold as an asset class with a three-month and 12-month target of $2,000 and $2,150 per ounce, respectively," penned Jitendra Gohil, head of India equity research at Credit Suisse Wealth Management in a co-authored note with Premal Kamdar.
Key Risk To Gold Prices As Per Chris Wood
1. An even more steepening of bond yield curve:
As per Chris the likely threat to gold prices in the near term shall be further steeping of the yield curve which may lead to short term correction. As it is from the peak level of $2070 per ounce hit earlier in August, gold has tumbled a substantial 6 per cent. And from a 1-year perspective gold is higher by 30% at around $1948/oz. Likewise on a year to date basis, the precious metal is ruling higher by an impressive 27 per cent.
"That is, of course, unless the market is convinced that the US Fed is going to remain dovish in terms of softening the inflation target at the next US Fed meeting and committing, sooner or later, to some version of yield curve control. For this raises the possibility that gold simply looks through such yield curve steepening," he said.
2. Waning of physical demand for gold especially in India:
Another pullback factor for gold as cited by Chris is the persistent decline in physical demand for gold in emerging nations especially India. For the second quarter of CY 2020 that ended in June, gold demand declined 70 per cent y-o-y to 64 tonnes, and declined 55% y-o-y for the whole of first half of CY 2020 to 166 tonnes. Similar scenario of decline in physical demand for gold was also witnessed in China and Middle East.