The price of gold bullion is likely to soar over the course of this year and next year, according to the latest liquidity report from CrossBorderCapital, who expect the precious metal to reach $2,000 in 2017.
The investment advisory firm believes that the changing mix in global liquidity fuelled by monetary policy will continue to weaken paper money and therefore lead to strong gold prices.
Gold has grown in popularity since the start of the year, with its spot price already increasing by 24.27 per cent over 2016 compared to just a 1 per cent total return from the MSCI AC World index as investors have begun to lose faith in central bankers.
Performance of indices in 2016
Source: FE Analytics
In an article published last month, a panel of investment professionals told FE Trustnet that their sentiments towards gold were positive, with Apollo Multi Asset’s Ryan Hughes (pictured) saying that the asset class was now back on his radar for the first time in several years. 
“The issue we had last year of course was that when equities were selling off gold was selling off at the same time, which meant it didn’t defend assets at all whereas this time it definitely has defended,” he explained.
“That’s a reassuring sign for getting some pure gold exposure. I think the best way to play it if you want physical gold is through an ETF as it’s the best way to protect yourself in times of volatility when gold behaves as it should.”
While more cautious investors could be wary of buying into the asset class now that it has begun to perform so well, CrossBorderCapital believes that it still has much further to go and will become more favourable to hold than cash.
As part of its latest research, the firm focused on different forms of paper money or “liquidity”. It then divided central bank liquidity, which is likely to weaken currency, and private sector liquidity, which is likely to strengthen currency as it indicates strong economic growth and an increase in demand.
For instance, if the US Federal Reserve begins to tighten monetary policy (therefore reducing central bank liquidity) or if US corporates create strong levels of cash, the US dollar is likely to rally.
However, the report points out that cross-border cash flows are also an important factor when it comes to currency movements in terms of both onshore and offshore activity.
“Cross-currency movements within the off-shore markets are important, such as the recent activity in offshore Chinese yuan deposits, whose ebbs and flows may owe much to the US dollar carry-trade, but where money still may never cross borders,” the team at CrossBorderCapital said.
“Aggregating these ideas across all paper units should tell us that paper money increases (decreases) in value when world private sector liquidity exceeds (falls short of) world central bank liquidity.”
“Gold is the antithesis of paper money. Therefore, strength in paper money means weak gold prices, and weak paper monies correspond to strong gold prices.”
The firm analysed central bank liquidity and private sector liquidity for the world and also separately across the eurozone, Australia, Japan, the UK and the US.
It found that global central bank liquidity is relatively tight despite quantitative easing from the ECB and that private sector liquidity is falling rapidly thanks to low liquidity in China and plummeting liquidity in Japan and the US.
World Central Bank and World Private Sector Liquidity since 2008
Source: CrossBorderCapital
“There is a surprising divergence in liquidity trends, which may help explain recent forex market volatility, but it also indicates the broad flatness in central bank liquidity and the plunge in private sector liquidity in the US and Japan,” it continued.
“Looking ahead, we envision further falls in US liquidity as: (1) US corporations continue to see downward margin pressures and (2) US shadow banks struggle to grow their loan books, constrained by collateral shortages and general risk aversion.”
In addition, CrossBorderCapital says that central banks, having been led by the People’s Bank of China and the ECB, are likely to expand liquidity to support fragile economies. As such, it believes that the balance between central bank and private liquidity will switch from an excess of corporate money, which is detrimental to gold price, to central bank money, which boosts it.
“The six-to-nine month lead-times of these liquidity measures give us a heads-up that the US gold price could test $1,500/oz. later in 2016,” CrossBorderCapital said.
Another factor the firm says should be considered is that commodity markets often follow the behaviour of gold, which would fit with its asset allocation sequence of equities in 2013, credit in 2014, bonds last year and commodities this year, which is based on the liquidity cycle.
Given the gold price currently stands at $1,276, the report says the precious metal could rally another 50 per cent by the end of 2017.
“This positive commodity price outlook does not necessarily suggest that the world economy is about to surge because commodity markets have two moving parts – a currency of denomination effect (e.g. the US$ gold price) and a real physical exchange ratio (e.g. gold/oil and gold/copper ratios),” it pointed out.
“We are more confident about help from the former, namely a stronger gold price. In fact, extrapolating further ahead, based on past liquidity trends, even suggests that gold at US$2,000/oz. is possible around mid-2017. Could the dollar’s best days be behind us?”
