Gold will fall to $1000: strategist

The recent move up in bullion prices has not been matched by gold stocks, suggesting the commodity has overextended itself, according to Pierre Lapointe, global macro strategist at Brockhouse Cooper. He recommends investors take profits on their gold positions and expects prices will start trending toward the US$950 to US$1,000 per ounce range, a decline of more than 30%.

With global gold stocks trading at 19.6x future earnings, they are not cheap compared to other equities as measured by the S&P Global 1200 composite index at 15.0x. Meanwhile, the bullion-to-U.S. gold stocks ratio is currently at 6.5x. If this ratio was to move to its historical average, that would imply a 46.8% gain for gold stocks. It would also push up the price-to-future earnings ratio of 28.8x, which is unlikely in Mr. Lapointe’s opinion.

“From a commodity perspective, we are of the opinion that bullion has overextended its increase,” he said, noting that currency movements are no longer in favour of gold.

The weakening U.S. dollar helped drive gold prices higher between June and October as investors expected quantitative easing to debase the value of the greenback. However, the strategist pointed out that the correlation between gold and the U.S. Dollar Index (DXY) has fallen to -0.77 in the past three months.

He also noted that with financial demand accounting for 32.5% of bullion demand, this faces a risk of drying up if gold prices do not continue to rise.

“ETFs might even be forced to sell some gold to respond to withdrawal demands,” Mr. Lapointe said. “This would remove a much-needed support for the yellow metal, and would exacerbate a fall in prices.”

He believes gold’s role as a safe haven will diminsh as the global economic recoveries solidifies.

The strategist also compared gold to oil, explaining that the bullion-to-oil ratio has been falling for several decades since there is real fundamental demand for energy as opposed to little intrinsic value for gold.

Mr. Lapointe said he wouldn’t be surprised if the bullion-to-oil ratio fell from 16x to 10x, the average level seen during the past economic expansion. Given his oil price forecast of US$95 to US$100 per barrel, he derives a target range of US$950 to US$1,000 per ounce for gold.

If bullion prices do start trending lower, he expects gold stocks will decline less since they have not risen to fully reflect gold prices.

Jonathan Ratner