Deutsche Bank: Gold not cheap enough, need to drop at least 25% - Analysis

"With the adjustment in U.S. real interest rates and the U.S. dollar still incomplete, the market should prepare for new lows ahead,” analysts from Deutsche Bank said in a report.

The bank also notes plunging oil may lend support to gold.

"It is sobering to think that gold prices would need to fall to around $750 per ounce to bring prices in real terms back towards long run historical averages.”

At the end of 2014, analysts suggested that gold’s fair value at that time stood at around $940 an ounce, but the recent plunge made them reevaluate their estimates to lower levels: "... fair value has now dropped further and stands at $785/oz.”

Analysts compared gold prices to the S&P 500 as well as inflation gauges in order to assess price points that would reflect the metal's value with its historical averages.

“To bring gold prices back towards its 1970-2014 average of 0.53x would require gold prices falling to $935/oz."

When observing premiums between bullion and gold financial assets over the longer term, strategists at the bank consider they are too high right now if compared to historical averages.

"Adjusting gold prices by the U.S. PPI and CPI, we find that in real terms gold is still trading significantly above its long run historical average,” they said.

"Indeed for gold to eliminate its premium in real terms it would need to fall to $725/oz and $775/oz on a PPI and CPI adjusted basis respectively to bring gold back to its 1970-2014 average.”

They also looked at affordability of the metal for G7 consumers over time and concluded that prices would need to fall further in order to be in line with historical averages.

An average G7 consumer annual income is sufficient to purchase around 55 ounces of gold, they estimate, and thus, "for affordability levels of a G7 consumer to return back towards historical norms then the gold price would need to fall towards $800/oz.” In other words, prices would need to drop by 25% from current levels.

The declining gold may be a drag on the whole metals sector with lower gold prices likely to negatively affect jewelry and investor demand for PGMs and specifically platinum, analysts say.

The bank also noted the oil prices may help buoy gold, as there is the possibility that further drop in the oil prices could help to delay Fed tightening, given the dampening effects lower energy prices would have on domestic inflation.

"Fed inaction would not only moderate the rise in US real interest rates but it might also assist in scaling back US dollar strength."