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What Will Drive Gold To Near US$1,700 Per Ounce?

Gold, the precious metal that was used as currency in ancient times, is currently priced at around US$1,300 per ounce after climbing from a level of US$1,000 or so at the start of the year.

There are many opinions floating about as to where the price of the precious metal would head to next, but analysts at Deutsche Bank think that gold should trade closer to US$1,700 per ounce.

In Singapore’s stock market, besides gold mining stocks, there is another listed entity that has direct exposure to the movement of gold prices: The SPDR Gold Shares ETF (SGX: O87). It is an exchange-traded fund that has the objective of reflecting the performance of gold bullion prices.

According to the Deutsche Bank analysts, the price of gold is correlated to the size of the balance sheets of central banks around the world.

Since 2005, the balance sheets of the world’s major central banks (those of the US, China, Japan, and Europe) have expanded in size by 300%. But, the value of the stock of above-ground gold has risen by only 200% or so.

The Deutsche Bank analysts think that gold should be around US$1,700 per ounce if they assume that the value of gold would track the expansion of the central banks’ balance sheets.

The central banks of Japan and Europe are currently engaged in aggressive asset purchases which would grow their balance sheets. In fact, Bank of Japan Governor Haruhiko Kuroda had recently promised that he would purchase more assets if Japan can’t hit its 2% inflation target. As for the European Central Bank, it has pledged to continue its €60 billion monthly bond-purchases up till March 2017.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Ong Kai Kiat does not own shares in any companies mentioned.