Against the backdrop of increasing economic uncertainty and geopolitical tension, gold has become the focus of market attention. Is today's gold price rising too much?

In Tuesday's report, Deutsche Bank pointed out that if the gold market has memory, this year's rise is actually recovering from the decline of the past ten years, and this year's excessive investment demand offset the massive redemption of gold ETFs in 2013.

Deutsche Bank continues to be bullish on gold, revising its year-end gold price forecast to $2,400 per ounce, which is expected to reach 2,600 US dollars/ounce by December 2025.

Deutsche Bank believes that judging from US inflation and monetary policy developments, the future trend of gold prices is favorable, while geopolitical tension in the Middle East will further support gold prices.

Gold price recovery “lost decade”

Deutsche Bank's fair value model for gold shows that this year's rise in gold prices is due to repayment of debt from the past ten years.

Deutsche Bank said:

In the traditional fair value model, we usually index the actual gold price in the previous period without considering historical errors to arrive at a forecast of 2,400 US dollars/ounce at the end of the year and reach 2,600 US dollars/ounce in December 2025.

However, by applying a “memory” to the model to assess today's fair value, it can be determined that the depreciation caused by the huge redemption of the ETF (30 million ounces) in 2013 has only now been corrected through central bank purchases in 2022 (28 million ounces in the second half of the year) and further purchases expected in 2024 (estimated at 10-14 million ounces).

Although 11 years is indeed quite a long time for an investment framework, the central bank believes that it has an unlimited investment time frame. The total undervaluation between 2013-2021 was approximately $300 per ounce, or 18% of the model's fair value, which is similar to the year-to-date increase in gold prices. The trend of gold prices will mainly depend on the possibility of cancellation of investment flows. We believe the risk of a large-scale sell-off associated with position cancellation is low as this trend continues to be consistent with investors' previous bullishness.

Multiple factors combined to benefit the price of gold

At the same time, Deutsche Bank pointed out that inflation and the geopolitical situation together benefit the price of gold:

From the perspective of inflation and monetary policy, the support factor for gold comes from “getting both,” that is, inflation is still a major issue, but at the same time, the FOMC believes that interest rates are already restrictive enough, and the next step is to start cutting interest rates. Our revised opinion on the Fed's interest rate cut this year (-25 basis points) is less than market pricing (-46 basis points). As long as the inflation and monetary policy situation remains in the middle, it probably doesn't make much sense.

The geographical conflict in the Middle East is another major supporting factor for gold prices. Resolving the conflict is becoming more difficult rather than easier, bringing the possibility of future disruptions and supporting the risk premium for gold.

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