Gold is going to $3,000 per ounce. That has been the stance of Oggonomics and its founder for some time. There is of course no guarantee about $3,000 gold. Zero. And gold could have already peaked. That’s just what reading the tea leaves looks like based on all of the available information today.
BofA’s metals team has a report from its U.K. commodity strategist Michael Widmer titled “Is Gold a Safer Investment Than Treasuries?” This 15-page report has some scary notions. After all, if the U.S. Treasury market ever becomes unsafe or outright bad then the one word that follows is simple — chaos!
According to the report, fiscal profligacy is bullish for gold to a $3,000/oz. price target. The historical tie that 10-year real rates have historically been a critical gold price driver, the correlation between the 10-year and gold has weakened. BofA sees a decline in interest rates as “still bullish” but higher rates do not necessarily put pressure on gold. The first item mentioned is concerns that fiscal policy in the US (and elsewhere) may not be sustainable. There is a perhaps somewhat ominous note about fiscal policies in the future:
Ultimately, something has to give: if markets become reluctant to absorb all the debt and volatility increases, gold may become the asset of choice. Central banks in particular could further diversify their currency reserves: the share of gold holdings is now at 10%, up from 3% a decade ago.
Perhaps the one saving issue is that BofA points out the U.S. isn’t alone in expansionary monetary policies. That said, here is the formula that matters:
Rising rates = higher debt servicing costs = concerns over fiscal sustainability…
According to Widmer’s team report, the Congressional Budget Office now has deficit forecasts higher through 2026, running at $2 trillion per year – about double the projections as recently as 2021. But if real interest rates are actually rising, what does it mean for gold remaining so strong? Widmer’s report says:
That said, real rates have also pushed higher in the past couple of weeks. Yet, gold has held onto its gains. The takeaway from this is that lower rates are supportive for gold, while higher rates are not necessarily bearish. In our view, this dynamic has been heavily influenced by the challenging fiscal backdrop especially in the US, which makes gold an increasingly attractive asset to hold. Indeed, rising funding needs, debt servicing costs and concerns over the sustainability of fiscal policy may well mean that gold prices could increase, if rates move up. This dynamic has played out periodically in recent months…
THE TARGETS FOR GOLD (AND MORE!)
Widmer’s team has estimates now pegged for 2024 end and 2025 end. Gold was originally put at $2,365/oz for 2024 and $2,750/oz for 2025, but these are hardly bullish now as gold is challenging $2,700/oz. The scope for gold to hit $3,000/oz was given multiple drivers here:
- Traditional relationships have broken.
- Recent rally was driven by central banks, Chinese investors and options buying.
- Western investors are waiting for rate cuts (ETF inflows will resume once monetary easing sets in).
- Chinese investors may slow gold buying… making Western purchases even more important.
Here are three more bullish views for metals that were included in the same 15-page report:
- Silver was projected to be $28.00/oz at the end of 2024 and then $35.38/oz at the end of 2025.
- Copper was forecast at $9,514/tonne foe 2024 and $10,750/tonne in 2025.
- Aluminium (that’s aluminum to the rest of us) was forecast to end at $2,504/tonne in 2024 and $3,000/tonne in 2025.
THE RATIONAL CONCLUSION
We all know that no one can say for sure what the price of any asset will be in the future. One key driver that is not discussed is that the All-In-Sustaining-Costs to get gold out of the earth are higher every year. Inflation dove up the cost of machinery and items needed for mining, extraction and production. Rising labor costs helped juice inflation ever further. Labor is likely to keep wanting a larger slice of the profits pie in the future. Gold’s messy and perhaps deadly extraction methods are likely to drive regulatory costs, environmental costs and remediation costs higher year after year ahead.
Perhaps one of the great mysteries of gold (and gold bugs) is that many gold investors own gold for entirely different reasons. Barter, stability, hedge, inflation, preppers, specialty industrial, and so on. But the common belief among all of these varying reasons is simple — they think gold is going higher. And one late reminder — there are absolutely zero assurances that gold or any other asset class has to keep rising in price.
