Gold Ready to Recapture Levels Not Seen Since 2016

Sprott Money CEO says current landscape is more favorable for gold than two years ago.

2016 was the last time gold climbed past the $1,370 level, brought up by a string of geopolitical concerns and a weaker dollar. But now, having already crossed the $1,340 mark, the metal looks ready to recapture levels last seen two years ago, while also setting new records in the process, reports Kitco.

In an analysis on Sprott Money, Global Pro Traders CEO David Brady explained why he thinks the current landscape is even more favorable for gold than 2016 was. According to a recent Kitco article, despite a robust greenback, which is often seen as one of its main headwinds, gold still managed to surpass $1,340 an ounce since the start of the year.

This display of strength is set to continue, said Brady, who sees gold heading towards the 2016 high of $1,377 this year, largely driven by central bank policies. As Brady noted, the Federal Reserve might be looking at a policy U-turn after hiking interest rates on an annual basis since 2015.

According to Kitco, the recent dovish stance expressed by Fed officials could soon make way for quantitative easing (QE), an inflationary policy that has heavily benefited gold in the past. Brady and other analysts contend that a new QE program will drive prices up, yet without the prospect of higher rates or Treasury yields. This will be the perfect environment for gold to stage its bullish run, said Brady.

The strategist feels that the recent sentiment turnaround among money managers is testament enough that gold is soon heading up. In just fourteen weeks, speculators slashed their short gold positions by more than half, which speaks good things about the metal's direction, reports Kitco.

Past the Fed situation, Brady feels that central bank policies around the world will likewise prove supportive of gold. As the CEO noted, all of these policies are ultimately setting fiat currencies up for depreciation, and gold is often cited as the best and surest protection from wealth erosion.

After hitting the $1,377 mark, Brady expects gold to pull back and potentially test several support levels along the way. This pullback, however, will merely act as part of an over-arching upwards trend that will eventually lead gold to new highs before the end of the year.

Meanwhile, Brady expects the opposite to happen with the dollar index (DXY). After so many months of persistence, the CEO finally sees the DXY peaking and falling to a figure as low as 80, which will be another highly bullish development for gold.

Goldman Sachs Revises Its Gold Forecast Upwards

Change Comes Just Weeks After Initial Forecast

Goldman Sachs is among the latest to go long gold amid a re-emergence of interest in defensive assets. A few weeks ago, the bank updated its gold forecast for 2019, from $1,350 to $1,425, citing risk aversion as the primary reason.

Now, in a more recent interview, Goldman's global head of commodities research Jeffrey Currie reiterated the bank's forecast with an upgrade. According to Currie, fears that another recession is around the corner could be a key driver behind gold's outperformance this year.

Although the markets, for the most part, retain the image of stability, numerous analysts have stated that a crisis could be brewing. The threat of stagnant growth in both the U.S. and Europe is ever-looming, and central bank policies have likewise done much to reinforce concerns.

Many have pointed out that nearly every U.S. hiking cycle has ended in a recession, and the Federal Reserve now appears to be slowly putting the wrap on a tightening cycle that started in 2015. The Fed appears to have been rushed along by equity downturns and other red flags, which are a recessionary concern of their own. To top it off, numerous central banks around the world are aiming to tighten monetary policy in the near future.

Currie highlighted the recent central bank bullion purchases, noting that the resulting "wealth effect" is enough to push gold prices to $1,425. Last year, the Indian government took cues from its people as it re-entered the gold market with a 70-ton purchase. Chinese bullion buying is also expected to intensify moving forward.

This is on top of standard buyers like Russia, Kazakhstan and Turkey, whose regular purchases act as perpetual support for gold prices. Bart Melek, head of global strategy at TD Securities, said that central bank gold holdings grew by 3,900 tons, or 13%, since 2009. The forecast that reserves will expand by another 800 tons in the next two years could push gold past the already-bullish expectations, said the strategist.

In his report, Melek explained that central banks are looking to diversify away from the U.S. dollar as the global market faces the prospect of another superpower in China. Melek thinks India's economy is another one to look out for, and the strategist believes the densely-populated nation could soon become a major player on the global scene.

Currie said that rising geopolitical tensions are another reason why central banks are looking for protection. Out of the various flare-ups, the U.S.-China trade standoff could prove to be the most beneficial for bullion due to the inflationary implications of the conflict.

Goldman's stance that long gold is the best commodity play is unsurprising, as the metal continues to outperform both equities and other commodities. Building up on the bank's previous forecast of $1,425 an ounce, Currie now sees gold reaching $1,450 sometime this year.