The secular bull run that started in the year 2001 is set to take gold prices soaring to over two-and-a-half times, as gold catches up its share in the US disposable incomes, and demand in India makes a comeback.
The secular bull run that started in the year 2001 is set to take gold prices soaring to over two-and-a-half times, as gold catches up its share in the US disposable incomes, and demand in India makes a comeback, according to noted market strategist Christopher Wood. The fundamental reasons attached to the current gold price rally have led Chris Wood to raise the long-term price target on gold to $5,500 per ounce (oz) at the “peak of the current bull market rally”, from $4,200 per oz.
However, the gold price may see near term corrections on its way to the revised target price, which is 165% more than the current price of $2,075 per oz, Chris Wood said in his popular Greed & Fear note of last week. It be noted that the gold price correction from the 2011 peak of $1,921 per oz to the late 2015 bottom of $1,046 continues to be viewed here as a cyclical bear market in the context of an ongoing secular bull market, Chris Wood, global head (equity strategy), Jefferies, said in the note.
Why gold prices have held up despite weak India demand
The weak demand for physical gold in India has been termed as a fundamental negative for the yellow metal. Consumer gold demand in India fell 70% on-year to 64 tonnes in second quarter of 2020, and fell 55% on-year to 166 tonnes in first half of 2020, the note said. Chris Wood said that for now he continues to view gold’s rise despite such weak physical demand as a sign of bullion’s resilience.
“The explanation is that this gold bull run has been driven by Western financial demand as signaled by the continuing money flow into both gold ETFs and, more recently, silver ETFs,” he added. The ETF holding for gold and silver across the world has risen by 31% and 47% respectively so far in 2020, the note said citing Bloomberg data.
What changed now to spur gold demand in India
While the high real interest rates that India has witnessed since 2014 is flagged as a negative for gold, now for the first time in nearly six years the RBI policy rate is below the inflation rate. With the interest rates falling below the inflation rate for the first time since 2014, Chris Wood said that this could prove to be a positive for physical demand of gold in India.
Gold price must catch up with US disposable incomes
Chris Wood is also bullish on gold given the vast disparity between the gold prices and per capita disposable incomes in the United States, compared to that in the past. “The gold price is now $1,952 or 3.6% of US disposable income per capita of $53,747. To reach 9.9% of US disposable income per capita means gold should rise to$5,345. This means that a price of $5,500 is now a reasonable price target for gold at the peak of the current secular bull market,” Chris Wood said. Back in the year 1980, at its peak of $850 per oz, the gold price was at 9.9% of US disposable income per capita.
Who else has taken a liking to gold
It is not just Chris Wood from Jefferies, Bank of America’s Fund Manager Survey for August recently showed that fund managers across the globe are long on gold, making it the second most crowded trade behind US Technology stocks.