Four Scenarios For Gold

The latest edition of the In Gold We Trust report lists four scenarios for gold. What are they?

On Monday, we provided a short summary of the annual “In Gold We Trust” report. However, we did not manage to cover the whole 169-page publication. Hence, today we would like to address the four scenarios for gold mentioned by the authors of the publication. These alternatives are as follows:

Scenario A: “Relatively strong real economic growth”. The U.S. economy begins to grow strongly, while inflation remains in an acceptable range. The gold price should trade in a range from $700 to $1,000.

Scenario B: “Muddling through continues”. Real U.S. GDP growth and consumer price inflation remain in a range of 1-3 percent. The gold price should remain in a range from $1,000 to $1,400 in this scenario.

Scenario C: “High inflationary growth”. The U.S. economic growth accelerates significantly (due to the implementation of Trump’s fiscal stimulus), but so does inflation. In this scenario, the price of gold should trade in a range from around $1,400 to $2,300.

Scenario D: There is either a recession, or stagflation. The significant weakness in the U.S. dollar sends the price of gold soaring. Gold prices between $1,800 up to $5,000 appear possible in this scenario.

What is striking in these scenarios is a huge price range. We know that making predictions is very difficult (especially about future), but saying that gold prices should trade somewhere between $1,400 and $2,300 (it’s a range of $900) is not very useful. You see, we may similarly say that gold will trade this year in a range between $0 and $10,000, but it will not make us a great forecaster.

Another controversial issue is the assumption that high inflationary growth would be necessarily positive for the yellow metal. It’s true that gold is a hedge against high and accelerating inflation, but a lot depends on the level of real interest rates. If real economic growth speeds up, gold may not shine.