Gold Prices Expected to Head Lower?
Antonio Ferlito | Mar 13, 2024 03:46AM ET
Contrary to popular belief, in times of low interest rates and accommodative monetary policies, gold is not the best investment. One of the main reasons why gold is seen as a favorable investment is because the resumption of Quantitative Easing (QE) and zero interest rate policy (ZIRP) has a positive impact on its value. Usually, when the fiat currency is devalued, durable goods such as gold become more valuable.
During periods of low interest rates, it is important to find zero-yielding assets such as gold that can still be attractive to investors. In this scenario, the yield loss is less significant than in situations where interest rates are higher. For example, if rates were at 10 percent, the opportunity cost of gold would be higher than if interest rates were at 2 percent. This means that during these periods, gold could become more attractive as a form of investment.
However, if we look at past data, we see that this has never happened. According to the data, gold tends to depreciate relative to stocks when monetary policy is more accommodative (even if its face value in currency increases). But why does this happen? The reason is still uncertain and can be attributed to the human behavior of traders. However, there are some dynamics that may help explain this phenomenon: in an environment of low interest rates and inflation fears, investors may prefer to pursue higher returns by taking on more risk.
Despite its limited opportunity cost, gold remains an attractive investment for rational investors. However, not all investors act rationally, and over the past decade we have seen many people prefer nonprofit startups to gold or dividend investments. During phases of expansionary monetary policy, the nominal value of gold increases relative to fiat currency. This prompts miners to mine more gold, further increasing the nominal value of gold.
Demand for gold is constant and is often driven by fear and uncertainty in the markets. However, gold has limited practical utility and can be mined at will, which keeps its prices artificially low. In addition, as a non-cash flow-generating asset, investors may prefer more profitable assets in a yield-hungry and inflation-influenced economic environment. Unlike corporations or real estate, gold is unable to raise prices to adjust to rising inflation, leaving it dependent on its perceived scarcity to thrive as an investment.
As always, we will rely on the analysis of one of the largest mining companies, Barrick Gold (NYSE:GOLD) Corp, to predict future movements in gold. Examining the activities of companies in the sector is critical to understanding the trend related to the asset. One of my favorite business valuation models is EPV (Earnings Power Value). This method involves basing a company's value on current cash flow, rather than future forecasts that may not come true. This provides a more realistic and reliable valuation of the company.
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As you can see in the image, the model suggests that the stock is currently overvalued. This makes me a bit skeptical about future gold prices.
My model's forecast for the next quarter indicates a gold price in the 2000 area, with the beginning of a sideways market phase. This means that there could be a period of stability in prices after reaching this level.
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