UBS Analysts Trigger Outrage With “Unbelievable” Gold Forecast

Global banks revise gold price forecasts, raising eyebrows everywhere

Bullion.Directory precious metals analysis 15 April, 2024
By Peter Reagan
Financial Market Strategist at Birch Gold Group

As it turns out, UBS.

But we’ll start with the more “tempered” forecasts and go on from there. The week has had a number of top Wall Street names issue some very bullish predictions for gold, with the moderate end being Goldman Sachs.

Once again upping their gold target to $2,700 they gave a fairly detailed explanation of what’s behind the price move, with this choice quote:

In fact, since mid-2022, most of the rise in gold prices has been driven by new incremental factors, ‘fear,’ including ‘fear’ that the monetary system will be difficult to maintain, fear of currency depreciation by emerging market central banks, and ‘fear’ about US fiscal sustainability and the general election.

It’s no small thing to have Goldman Sachs acknowledge the deep-rooted distrust in the sustainability of the current state of affairs. We can rephrase it in a more straightforward manner: investors across the world are wondering whether free-floating fiat is headed down the drain, and whether traditional assets are in for a serious review. Unsurprisingly, gold is the primary beneficiary of these worries.

Then we get to Bank of America, which goes as high as $3,000 in its forecast.

Seeing the possibility of a much-needed rise of silver to $30 in the next 12 months, Bank of America had this to say:

Gold and silver are being promoted by central banks, Chinese investors, and a growing number of Western buyers. Macroeconomic factors are favorable to gold and silver, including that the Federal Reserve will cut interest rates during the year. Once interest rate cuts are implemented, gold purchases should expand, which may further push up the price of gold.”

We’ll keep this very important note in mind for our story down below. For now, let’s focus on our third forecaster, which is UBS and their $4,000 price target for gold.

Like their target, their rationale is a gold bull’s dream. Unlike the previous two which focus on things like data and drivers, UBS simply finds the action as a form of price catch-up to what the real valuation should be. They back their forecast with multiple instances of just this dating back 50 years, while noting:

If history repeats itself, it’s not too late to participate in this gold rebound. Investors holding 2-3 years may see the price of gold double to more than 4,000 US dollars.”

It’s an exciting time for all gold investors, and not just because of the price move. Everything UBS says makes sense, as we’re hearing left and right that gold is being re-introduced into the monetary system.

The truly optimistic gold bulls might hope that gold prices will become a secondary point of interest somewhere down the line, but not too far in the future. A scenario like the early days of America, where gold was money and its valuations were decided based on monthly and yearly fluctuations of supply and demand. Up and down money, instead of always down. It’s probably too extreme of a view given how entrenched central banks are in their system, so we’ll stick to hoping that UBS is correct.

Gold’s price moves may puzzle analysts, but there are rational explanations

If gold investors open the headlines right now, they will be told that gold’s rise happened due to Iran launching drone attacks on Israel. But that is inaccurate.

Gold climbed to another all-time high of $2,431 before immediately pulling back on Friday, April 12, with this analysis published in the evening hours noting it had encountered technical resistance when it reached that level.

But the strike was launched on Saturday evening, around 24 hours after the aforementioned action.

If the military conflict in the Middle East was truly the driver of gold’s price, we could not have the retracement that we did. This is possibly the biggest escalation since the conflict started, so gold should have climbed right back to $2,431 before shooting to highs that are anyone’s guess.

This report published earlier today almost pretends like gold didn’t shed nearly $100 after the attack, saying it rose by almost 1.2% after the drone and missile launch.

But that rise still “only” brought it to $2,361, which, as you might recall, is an all-time high set over a week ago.

To be clear, the conflict between Israel and Iran, along with possible proxy nations, is of greater significance to the global markets than the Russia-Ukraine conflict. Ukraine was and is merely “assisted” by the West, while the U.S. has voiced full support of Israel.

Given that the gap between the West and BRICS has widened further in the meantime, gold should have, by all accounts, leapt to some really high levels. As you might also remember, it did just that when Russia attacked Ukraine, going to an all-time high with such force that it surprised many.

And so the story of what’s really driving gold up takes an even more complex turn. We now appear to have evidence that it isn’t the Gaza conflict. There have again been no drivers of note. Dominic Frisby has turned gold bear on the issue, in an analysis that can be taken with a grain of salt as he wonders if we’re seeing a Hunt Brothers scenario unfold. Well, that’s a stretch for too many reasons to list, but it’s interesting from a curiosity standpoint alone.

Frisby is a known gold bull, so we are in some strange times when he is calling for a price fall and UBS for gold price to double within two to three years.

Chris Wood of Jefferies, a veteran investor, doesn’t go to the extremes that Frisby did, but still scratches his head, too. As if it’s supposed to be a critique on the price move, he says that:

The physical premium on gold bars and coins traded in Singapore are at only a normal 1-2% compared with the 7-8% levels seen at the peak of the last bull market in 2011 and 2012.”

Doesn’t this mean we are experiencing a normal price movement, as abnormal as it might seem, as opposed to being a tail-end bull run frenzy? Either way, we find it increasingly curious that everyone else is curious as to the reasons why gold might be going up. Goldman Sachs, Bank of America and UBS have said some of it already, but let’s see if we can make a short list…

• Sovereign debt is ballooning everywhere, and there is no way out of it (beside inflation)
• Trust in institutions has hit all-time lows, including trust in central banks (the issuers of currency – you know, that paper stuff that doesn’t go nearly as far as it used to)
• We’re in the middle of the worst inflation in 50 years, but the Fed is fighting it very slowly and reluctantly
• BRICS is openly planning its own currency, and everyone believes it will be gold-backed
• Nations around the world are stockpiling gold
• There is not a single fiat currency to flee away from inflation to
• The Japanese yen, not too long ago touted as equal to the franc or the pound sterling, has gone the way of the Argentinian peso
• An awful lot of assets appear overvalued right now
• Few believe that official inflation reports are correct –their own costs of living have FAR outpaced the official numbers, and they’re looking for inflation-resistant investments

That’s a pretty long list of why gold might be shooting up, and we were only just getting started. Perhaps it’s not such a head-scratcher after all?

The changing link between interest rates and gold’s price

When gold is gaining $100 week after week, it’s easy for important stories to get buried. One such was the highly interesting notion that the Federal Reserve might actually raise rather than cut interest rates this year.

But it has been covered, even by the mainstream.

If you dig deep enough, you’ll find many compelling presentations on the notion, such as the one published by CNN on Thursday. In it, several prominent economists are quoted with a pretty straightforward opinion on the matter.

“You have to take seriously the possibility that the next rate move will be upwards rather than downwards,” said Former Treasury Secretary Larry Summers. In 2021, he was in the minority of officials willing to admit and caution that inflation wasn’t a temporary issue to be swept under the rug.

And would you believe, higher-than-desired inflation is the reason we have the hike predictions to begin with. March was a disappointment in that regard, showing that basically every cost is going up too high and too fast (we discussed this last week).

Of course, the Federal Reserve has only gone so as far as to say that it might be too soon to consider rate cuts. Well, that’s obvious!

What are the readings like? In short, we have higher inflation across the board compared to a year ago. Those pandemic-era supply chain disruptions should have dissipated quite some time ago. Just based on official figures, which are infamously undersold, the inflation rate is 3.5%-3.8% compared to 3.2% a year ago. In other words, the Federal Reserve has accomplished nothing over the past year.

What can the Fed do in this scenario? As usual, its options are limited and not particularly popular…

1. It can hike interest rates again, even though it’s clearly not working, admitting that inflation is an even bigger problem than we thought, and we know it’s a huge one. Consider, this round of interest rate hikes prompted the #2, #3 and #4 largest bank collapses in American history. Since the Fed prioritizes systemic stability over household stability, this seems unlikely.
2. It can do nothing, sit back and watch the monthly data and hope that inflation will somehow, magically, go away on its own. (By the way, this is by far the most likely short-term course they’ll follow – and have been since last July.)
3. It can cut rates to meet expectations, but that will only bring on a bigger wave of price increases. Trying to fight rising inflation with an easy-money policy is what led to the infamous stagflation of the 1970s, America’s “lost decade.” This is inevitable, as in “absolutely will happen,” but we don’t know when.

Here, we will return to the quote from Bank of America, which said that gold prices should, in a sense, really start to get going when the Fed finally cuts rates. As we read that, we are reminded that gold is still in a hiking cycle. All of the gains have happened in the middle of a hiking cycle, generally viewed as one of the worst environments gold can be in.

We are told that economists have priced in rate cuts as one explanation for gold’s price today, but could they have really done that based on the data we just presented? It doesn’t seem to be the case, which is why we’re hearing rate cut forecasts being pushed back another quarter.

While the gains have been larger than expected, gold has so far done what it has historically done, which is not underperform during hiking cycles. It outperforms during cutting cycles, and there’s no reason not to expect it to be the case again.

The greater the hiking cycle, the larger the loosening has to be afterward.

The delay has all that’s necessary to turn gold’s rate-cut gains into a monumental story, which might be a reason why some are saying that the real action in gold has yet to come, a year, two or even three down the line.

This article was originally published here

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