BofA forecasts US$3,000 gold in 18 months

Bank of America says gold could hit US$3,000 per oz. in 18 months, up from a previous forecast of US$2,000 per oz.

“As economic output contracts sharply, fiscal outlays surge, and central bank balance sheets double, fiat currencies could come under pressure and investors will aim for gold,” the bank said in a research note on April 20.

“True, a strong US dollar backdrop, reduced financial market volatility, and lower jewelry demand in India and China could remain headwinds for gold,” it stated. “But beyond traditional gold supply and demand fundamentals, financial repression is back on an extraordinary scale.”

Lower GDP growth rates around the world will continue to fuel massive monetary easing, the bank said.

“One of the most intriguing developments ahead is that U.S. GDP could drop by 30% year on year in the second quarter of 2020, the steepest collapse ever in modern history,” the report stated. “Other countries like Japan will likely experience a 21.8% decline in output, while China just reported a contraction of 6.8% in 1Q20. As central banks rush to expand their balance sheets and backstop the economy, a lot of risks could effectively be socialized, boosting the appeal of gold.”

“In aggregate, major central bank balance sheets have been stable at around 25% of GDP for the last decade or so. But clearly COVID-19 has started a race to increase balance sheets and save domestic asset values.”

The report’s authors also noted that gold, unlike oil or natural gas, “is not constrained by storage dynamics and its price is not necessarily mean-reverting to the marginal cost of production over the long run.”

The bank, which describes itself as “long-term gold bulls,” forecast gold will average US$1,800 per oz. in the fourth quarter of 2020 and US$2,250 per oz. in the third quarter of 2021.

Its real gold price estimates are US$1,695 per oz. in 2020 (up 4.7% from its previous forecast), US$2,012 per oz. in 2021 (up 25%) and US$1,808 per oz. in 2022 (up 16.9%).