- Gold is still expensive compared to cyclical assets…
- …mainly because of the underperformance of cyclical commodities in a risk averse environment
- We expect gold prices to weaken and price ratios relative to other commodities to move lower
Gold is still expensive compared to cyclical assets
In this report we take a different angle to determine if gold prices are expensive relative to other commodity prices, including oil prices and copper prices. We compare the current values to the long-term average (since the 1990s) and our forecasts for the end of 2015 and 2016. We find that gold prices are still relatively expensive despite prices being at 5-year lows (see table below).
Cyclical commodities have underperformed…
There are several reasons for this. First, cyclical commodities such as copper, platinum, palladium and oil prices have suffered because of a supply overhang (mainly oil), smaller supply deficit (palladium) and considerable downward adjustment of demand outlook from China (copper, palladium). Gold is not a cyclical asset and therefore it has suffered less.
…and deterioration in investor sentiment supported gold
In addition, investor sentiment has deteriorated this year because of a number of factors. In general, cyclical assets underperform when uncertainty and nervousness increase. The environment has been suitable for gold to outperform. However, gold’s safe haven status has been sharply reduced because of investors positioning in gold. As a result, gold has been able to profit less than in previous periods of risk aversion when investor positioning was lower.
Going forward we expect lower gold ratios
We expect gold price ratios relative to other commodities to weaken for several reasons. For a start, expectations about the demand outlook for cyclical commodities will likely improve. This is mainly because we expect the global economy to strengthen going forward driven by strong domestic demand. Moreover, we expect investor sentiment to improve, with lower equity volatility (VIX) as a result. In addition, the recent bouts of risk aversions probably have resulted in reducing of substantial outstanding long positions in cyclical commodities. However, investor positions in precious metals remain substantial. Therefore, we expect investors to further reduce net long positions in the wake of Fed rate hikes this year and next year and a higher US dollar. Moreover, we see more downside if we take into account the gold price corrected for US consumer price index. If we take all the above-mentioned measures into account, gold weakness is not over yet and further price falls are likely.