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The price of gold in euros fell this week to its lowest level since the beginning of 2016, but according to analysts at Bank of America, that is no reason to turn their backs on the precious metal. In an interview with Bloomberg Francisco Blanch, a commodities analyst at the bank, said the price of the precious metal could rise to $1,350 per troy ounce next year. That is more than 10% more than the price at which gold is changing hands at the time of writing and 5% more than the average price of the past twelve months.
In a statement to Bloomberg, analyst Blanch expressed his expectation that the Gold price will recover next year, as the US budget deficit will continue to widen as a result of President Trump's tax measures. The deterioration in the U.S. government's fiscal situation — more debt and a larger deficit — will drown out positive sentiment about the U.S. economy in the long run, he said. That's a situation that, according to the Bank of America analyst, is "pretty positive" for gold.
Bank of America expects gold price to rise to $1,350 per troy ounce (Source: Bloomberg)
According to calculations by the Congressional Budget Office, the United States' budget deficit will reach $1 trillion by 2020 as a result of Trump's tax plans. To put that in perspective, that's comparable to the Obama administration's deficit in the depths of the financial crisis.
Partly due to Trump's fiscal stimulus, the US economy is running at full speed, but this fiscal policy is certainly not without risks. Economists warn of an overheating economy as consumer spending and business investment rise to levels that are not sustainable in the long run. As a result, the next recession will hit even harder.
A second risk factor is the financing of US government deficits. These are largely financed by foreign countries, but it is questionable to what extent other countries are willing to finance them, especially if the Trump administration takes more protectionist measures that affect other countries. In a trade war, the willingness to finance the U.S. debt burden will decrease further, making the government in Washington more dependent on domestic financing. Bank of America analyst Blanch had this to say about that.
"Eventually, the trade war will come back to the United States like a boomerang. It may take a while or it may happen very quickly, but eventually it will. Maybe the Federal Reserve will see that in time, and that's what investors will look at as a positive signal for gold. We know that trade wars are not good for the economy."
The gold price is currently under pressure due to interest rate hikes by the Federal Reserve. Also, the U.S. government is currently paying higher interest rates on its government bonds, because it has to get a lot more money out of the market to cover spending. In the short term, that's negative for gold, but it's a situation that analyst Blanch says won't be sustainable for long.
It's not just Bank of America that expects the price of gold to rise next year. Goldman Sachs is also pricing in a price increase over the next twelve months, reaching a level of around $1,325 per troy ounce. The precious metal has fallen 8.6% in price since the beginning of this year, measured in dollars. In euros, the price fell by 6.6% this year to less than €33,000 per kilo, the lowest level since the beginning of 2016.
