GOLD PRICE ESTIMATE FOR 2014 and 2015
Based on the Gold Regression Model, I estimate that gold will see a modest price increase in 2014, rising from $1278 in June to $1365 in December (+6.73% or +13.91% annualized). 2015 will be a lackluster year, with gold ending at $1340 (+4.82% or +3.19% annualized). There are several factors impacting the gold price negatively, such as the recovering US economy, accompanied by higher interest rates, a stronger USD and an end to the QE program. These are balanced by several positive factors. The world’s money press has been packed and shipped from the US to Europe and Japan. These two economic slumbering giants will add more money to their monetary base and keep interest rates near zero throughout 2014 and 2015. Both will battle deflation, with inflation remaining at or below 1% (excluding the Japanese consumer tax hike). There is a balance between the negative and positive factors, which will provide a floor and cap on the gold price. I predict gold will be trading between $1250 and $1430 per ounce in the coming 18 months, with a peak early 2015, before the US raises interest rates.
The United States and the Federal Reserve
In 2014, the long dreaded tapering of Quantitative Easing (QE) became a reality. Before January 2014, $85B was conjured by the wizards of the FED and invested in government debt and mortgage backed securities. Thereafter, the massive capital injections were reduced every month by $10B, which mean that the very last liquidity injection would be in October. All this new money piled up in the US Monetary Base (MB), which ballooned in 2013. However, with lower monthly capital injections, the MB grows at a modest pace to $4065B at the end of 2014. The FED Fund rate and thus short term interest rates will remain artificially low, near zero, throughout 2014, while inflation will run up to an uncomfortable level of 2.75%. Long term US government bonds will rise to 3% and US Corporate Junk bonds will remain near 5.5%, narrowing the Yield Spread 2.5%.
Since the question surrounding tapering QE3 is off the table, uncertainty migrates to the area of the FED rate hike. I estimate an increase in the FED Fund Rate in small steps from 0.50% in July to 2.00% in December 2015. Inflation will drop to the FED target of 2.00%, lifting the US real interest rate out of negative territory for the first time in years. The Yield spread will be 2%, with long term US government bonds at 4% and US Corporate Junk Bonds at 6%.
The Euro Zone and the ECB
The second half of 2014 will be the period that the printing press is packed up and shipped across the Atlantic. In Europe, the ECB’s president Mario Draghi is forced to act on his rhetoric “Whatever it takes”. He starts printing new Euro’s in a cascade of Long term Refinance Operations (LTRO) programs, providing €150B of cheap loans to the Euro Zone banks in September and again in December 2014. As a result the Euro Zone MB will rise from €1191B to €1500B at the end of 2014. Short term interest rates in most EU members remains near zero, while the HCIP inflation ends below 1%. With the Euro Zone enjoying a much lower inflation than the US, while both have near zero interest rates, the Euro Zone has a higher (or actually less negative) real interest rate. This supports a relative strong Euro, ending the year at 1.33
In 2015, the ECB will continue with new LTRO loans of €150B ($200B) every quarter, pushing up the MB at the end 2015 to €2100B. Short term interest rates will not be increased and remain cemented near zero. All economic policies in Europe remain focused on confiscating more wealth from their citizens through higher taxes or attempting to create higher inflation. With virtually no policies to address Europe’s structural problems, namely the outsized welfare state and uncompetitive South, I see no room for the heavily taxed European consumers to increase spending. The economy remains stagnant and inflation below 1%, well under the ECB target of 2%. The ECB will be forced to launch more LTRO’s. Europe is looking particularly weak compared to the US and therefore the EUR:USD will end 2015 at 1.23.
Japan and the Bank of Japan
In Japan the recent upheaval in the economy reinforces president Shinzo Abe to continue on the path set out by Abenomics. The first arrow, large scale monetary support to end deflation, has the Bank of Japan (BoJ) adding ¥5.4T ($53B) every month to the MB, which ends 2014 at ¥266T, or approximately $2605B. Short term interest rates remain near zero. Tax reform to kick start the economy is the second arrow of Abenomics, including a 3% increase in the consumption tax. Because of this hike, Japanese inflation remains artificially elevated near 4% at the end of 2014. The Japanese real interest rate will be even more negative than in the US, but investors are factoring in that the 3% increase will disappear in March 2015. Meanwhile, the Japanese economy is slowly climbing out of its decade’s long quack mire. These factors combined will set the USD:JPY lower at 98 for the end of 2014.
In 2015 Inflation will drop to 1.4%, with the 3% consumption tax hike removed from the annual inflation calculation. The Japanese economy will grow slower than the US and the Japanese Real Interest Rate will also remain negative, compared to a positive one in the US. Meanwhile the BoJ keeps adding more freshly minted Yens on the Japanese MB, which ends 2015 at ¥330T ($3180B). Therefore I forecast the Yen to lose value and the USD:JPY to close 2015 at 104.
China and India
The two largest markets for physical gold, China and India will increase their influence on the gold price. China is also working hard to establish an electronic gold trade market for Gold spot and futures, to challenge the dominance of the gold duopoly of the LBMA and CME. Their currencies will have a greater impact on the gold price when trading volume rise in China and India. Both countries will also witness loose monetary policies to encourage growth at all costs, which will push their currencies down. My estimate for the end of 2014 is the USD:RMB at 6.30 and the USD:INR at 61.50.
The Indian economy, has gone through a rough patch, but I estimate that it will be improving, thanks to India’s new president Modi. I suspects Modi will take a page out of Shinzo Abe’s book and starts much looser monetary policies in 2015. China will desperately try to avoid a hard landing and keeps supporting the credit and real estate bubble with new money injections. Therefore, I forecast the USD:RMB ends 6.45 and the USD:INR at 66.00
Technical Analysis estimate
In 2013 the Gold Price set a series of lower tops, all perfectly aligned with the descending resistance line. In January 2014, the Silver Price broke through the resistance line and in February through the 100 Days Moving Average. Both trends indicate that the trend of lower gold prices is finally broken. This leaves room for a recovery to the previous tops, of 1350 and 1425.