Spark Global Limited reports:
Credit Suisse argues that gold may be undervalued on a strictly fundamental basis. Moreover, with the ever-present risk of runaway central banks and market crashes, and the explosive growth of the global money supply, now is the time to buy gold shares as a hedge against risk. It sees at least 7 per cent further upside.
According to Global equity strategist Andrew Garthwaite, gold shares trade at an unusually cheap 12-month rolling price-to-earnings ratio (a 25 per cent discount to the broader market, compared with a 30 per cent premium normally), as well as cheap price-to-book relative to the broader market.
As for gold itself, Credit Suisse notes that it is also at the bottom of a 10-year range relative to silver or industrial commodities, and is 20 per cent below its 2011 peak in real, inflation-adjusted terms. Gold technicals suggest an upside breakout.
[Gold price upside potential]
According to the Credit Suisse model, gold prices are driven by TIPS yields and the dollar. Given the current decline in TIPS yields (considered real interest rates) and future trends, combined with structural bearish views on the dollar, Credit Suisse sees 7% upside potential for gold.
On a strictly fundamental basis, gold may be undervalued, and there is always the risk that central banks will run out of control and markets will crash. As Garthwaite writes, “Gold is a hedge against extreme financial deleveraging.” He adds:
“Government debt, deficits and corporate debt levels are very high. We continue to believe that if TIPS yield much more than zero, it will start to raise fears of a debt trap, which in turn could lead to a large risk-off trade. This could prompt the Fed to respond by pushing down real yields [and devaluing the currency].”
Gold also serves as a hedge against explosive growth in the global money supply:
“We think this will also lead to more gold purchases by central banks [as currencies are depreciating]. Central banks account for 12% of gold demand. According to our calculations, if all central banks collectively hold more than 10 per cent gold, gold demand will increase 1.6 times.”
Reprint indicated source：Spark Global Limited information