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.
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