Why should the gold price rise to $ 2,000?

Frankfurt Precious metals could become more expensive in the coming year. According to experts, one driver is likely to be continued very high inflation – in contrast to the common expectations of significantly lower inflation. “Then in 2022 we will reach the top from August last year at over 2000 dollars a troy ounce,” believes Robert Hartmann, co-founder of the precious metal trading company Pro Aurum.

The specialist also feels confirmed by private experiences. Acquaintances would ask him more and more about buying precious metals: Inflation is high, and now banks are even charging penalty interest. The question arises of a way out. This also increases the tendency to buy gold.

In the current year, however, gold has not lived up to its reputation as a classic inflation protection, even if the price has hovered around the mark of 1,800 dollars per troy ounce and thus 31.1 grams in the last few days. And this despite the high rates of currency devaluation reported in the past few months in the USA, the euro zone and Germany.

Pro Aurum expert Hartmann explains this with the historic high of 2063 dollars, which the gold price reached last summer. “We have already taken a big swig from the bottle,” he says. In other words: a certain normalization was due in the current year.

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Probably not enough investors believe in longer-term higher inflation either, suspects Ronald-Peter Stöferle, gold expert and co-founder of the Incrementum asset management company. He finds a second reason for the disappointing development in the current year: “Bitcoin has meanwhile become an alternative to gold, especially for investors in the USA.”

Other experts share this view. This also applies to Stöferle’s last point of explanation: the strong dollar. Since the world’s reserve currency is seen as an alternative to gold from a foreign exchange point of view, a rising dollar weakens the precious metal.

Shares attract a lot of investors

The fourth reason for the tepid development of the gold price: investors could simply earn more elsewhere. Commerzbank commodity analyst Carsten Fritsch points out: “The sustained soaring stock markets from record high to record high may have reduced the attractiveness of gold.” – S&P 500 share index more than doubled.

After this boom, the stock exchanges become more and more prone to setbacks. Fritsch even believes that such disillusionment is likely. “Then tactical investors should switch from stocks back to gold, which is significantly undervalued compared to stocks,” believes the analyst.

The ratio of S&P 500 and gold is currently at 2.6, its highest level since 2005. In this sense, stock market setbacks plus gold price increases would mean normalization. For the “tactical” investments mentioned, investors should choose ETFs.

Because of the many negative influences this year, investors are not particularly keen on gold-backed securities that have a strong price influence. This is especially true for the important US investors. Commerzbank man Fritsch knows the numbers: “In 2021, gold ETFs will have their first year with net outflows since 2015.”

These funds, which in turn deposit the metal, are convenient for investors to trade like securities. For many investors, and in particular large investors, such access is much faster and more convenient than the costly purchase of bars.

The outlook for the next year depends crucially on inflation expectations and how they will change. Specifically, it is about the real interest rate, which is an important determinant of the gold price. What is meant is the nominal interest rate minus inflation.

This quantity tells how much an investor actually remains as value. The lower the real interest rate, the less attractive interest investments are – the more exciting gold is in return. In the current situation, this indicator seems to give a very clear signal for the metal.

Real interest rates play a major role

Robert Rethfeld from Wellenreiter-Invest does the math. Such a negative US real interest rate, currently around minus five percent, only existed in the decade of inflation in the 1970s. At that time, the gold price also reached its then high.

Rethfeld is currently warning of euphoria: “According to our assumption, US inflation will fall from six to three percent in the first half of 2022.” Therefore, the real interest rate will become less negative, which will slow down the gold price. The price could only rise again in the second half of the year.

The devaluation of money and the reactions of the central banks to it will play a key role for the gold market. Commerzbank expert Fritsch recalls the current extraordinary situation: The US inflation rate is almost seven percent at its highest level in 39 years, in Germany with more than five percent at the highest level in 29 years.

His conclusion: if higher inflation solidified and the central banks did not react appropriately, gold would benefit from it as an inflation protection. The end of US bond purchases and three US interest rate hikes in the coming year are already included in the current gold price.

Warning signs of inflation

Some analysts argue even more aggressively. Eugen Keller from Bankhaus Metzler is concentrating on Germany and is already recognizing the harbingers of high inflation. The wholesale prices played a key role: “They are an important indicator for the later development of consumer prices.”

In November these prices rose by 16.6 percent compared to the same month last year. It was the highest increase in almost six decades. The German producer prices developed even more blatantly. “At some point our monetary authorities should finally look the truth in the face,” says Keller.

This is where Thomas Mayer, an economist at the well-known asset manager Flossbach von Storch, comes in. He suspects “that the key monetary politicians of the European Central Bank have not yet understood what their policy of low interest rates and money glut has done and could still do”. Setbacks in inflation due to base effects at the beginning of the new year are unlikely to persist.

Mayer underpins his thesis with an economic model calculation, which includes the amount of money, the increase in production and the speed of money circulation. “Under the various assumptions, the inflation rate in the coming years will be between 3.7 and 8.8 percent,” he sums up. Mayer does not want this to be understood as a forecast, but considers his calculation model to be realistic.

The topic also has an impact on the Christmas business at Pro Aurum. “This year, customers are buying and giving away precious metal coins and bars because of inflation concerns,” reports Hartmann. On average, a buyer spends between 700 and 1200 euros. For those who want to spend more, the classic one-ounce investment coins are the first choice. “Number one is and will remain the South African Krugerrand, but other coins such as the Canadian Maple Leaf are also popular,” says Hartmann.

Charm of the investment coins

The prices here are around 1,600 euros. The gold lover pays a certain premium. There is around five percent between the buying and selling price. The coins are also available in smaller denominations of half an ounce and less, as is the case with bars. But then the surcharges on the pure material value are also higher.

Some buyers also value an interesting design that changes every year. The Australian lunar coins show an ox in the current year of minting and a tiger in the coming year. Australia also offers a new look of the jumping animal for its gold coins with kangaroo motifs every year.

From an investor’s point of view, Hartmann does not consider gold jewelry to be an alternative. There the customer receives comparatively little metal for his money. For machine-made gold jewelry, he estimates the surcharge on the pure metal value to be a quarter. In the case of handmade pieces, it is more than half.

More: How the world will change and how investors prepare for it.

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