Historically, the price of gold is correlated in unique ways with a variety of market metrics. By looking at the movement in these market metrics, we can make fairly accurate educated assumptions about how gold will react.
One such metric that’s especially important right now is central bank balance sheet expansion. For the past 10 years, the price of gold has closely tracked the rate of central banking balance sheet expansion, with a couple exceptions. In both cases over the past decade where gold has failed to track central bank balance sheet expansion, something big was waiting right around the corner.
Now it’s happening again, and news from Business Insider suggests it could be a signal that gold is actually worth far more than its current spot price:
Gold may be worth more than what traders have decided is the spot price.
There’s a correlation between gold price changes and the rate at which central banks bought assets to expand their balance sheets, according to Deutsche Bank’s Michael Hsueh and Grant Sporre.
And the pace of balance-sheet expansion — by 300% since 2005, according to the analysts — indicates that gold could be worth more.
They wrote in a note on Friday:
“Let us be clear; we are not saying that gold will trade up to USD1,700/oz in the near term, but when viewed against the aggregated balance sheet of the ‘big four’ global central banks (the Fed, ECB, BoJ and PBoC) the argument can be made if we view gold as a currency, the metal is worth closer to USD1,700/oz, versus the spot price of USD1,326/oz.”
To be sure, this isn’t an argument for gold as a currency, and there are arguments against that notion. For one, gold isn’t a legal tender that’s widely paid or received in exchange for goods and services, partly because it’s not as easy to print or transport as paper cash.
But the argument that Hsueh and Sporre make is that gold price percentage changes have historically moved in tandem with the rate of central bank balance-sheet expansions, but gold is not keeping up right now:
“Over the same period [2005 till now] as the aggregate central bank balance sheet expanded by 300%, global above ground stocks grew by 19% in tonnage terms or c.200% in value terms. If we were to assume that the value of gold should appreciate to keep the overall value of the big four aggregate balance sheet equivalent to that of the value of the above ground gold stocks, then gold should be trading closer to USD1,700/oz.”
What do you think this means for gold prices moving forward? Can we expect to see an upswing in spot prices to reflect this analysis?
Give us your take in the comments.