Gold and mining stocks could benefit in the atmosphere of increased bond market bubble and higher inflation which are expected to be driven by global monetary easing, says one European fund.
In Gold We Trust - report released by Liechtenstein-based Incrementum AG - underscored some of the factors driving gold in 2015. While there seem to be more downside risk to the gold market, the institution said that it is expecting prices to climb to $2,300 by June 2018.
“The main reason
why we are not abandoning our fundamentally positive assessment of gold
is the continuing combination of obvious over-indebtedness,
expansionary fiscal and monetary policies, and the ironclad
determination of policymakers to generate price inflation,” the report said.
Although the long-term outlook is upbeat for the precious metal,
the authors at Incrementum suggested
that they could not rule out another test of the recent lows in the
near-term.
The authors said they are expecting a final selloff to re-test support at $1,140 an ounce before there is a long-term rally.
They explained that the yellow metal has been in its four-year downtrend because of the higher attention to the Federal Reserve, which has made credit spreads tighter, flattened U.S. bond yield curve, caused slower growth of the U.S. monetary supply, stronger equity markets and higher opportunity costs.
While suffering against the U.S. dollar, gold has managed to gain against other world currencies since central banks around the world have been loosening their monetary policies, weakening their currencies to spur growth.
The U.S. central bank is the only bank in a position to lift interest rates in 2015.
However, the report added that “As long as de facto every other major central bank prolongs its zero
interest rate, resp. negative interest rate policy, we regard a
significant deviation by the Federal Reserve as unlikely, as the upward
revaluation pressure on the U.S. dollar would be too great, which in
turn would definitely have negative consequences for the fragile U.S.
economy.”
“As a result, we consider the narrative of an isolated U.S. rate hike cycle to be naïve.”
The fund not expects gold to benefit as an inflation hedge, as well as to benefit as a hedge versus the increasing potential of a currency crisis.
Another result of the global monetary easing is that government bond markets are in increasing “bubbles” and investors could return into gold as these markets burst. At the end of the day, climbing inflation will push bond yields higher and spur a selloff in bonds, where “the potential for losses is enormous.”
The bubble bursting can be averted by
launching an ‘infinite QE program’. However, it means that sooner or
later, confidence in the currency will disappear and it will lose all
purchasing power, the authors say.
