The fair value of gold, this model can explain! Is this year's rise in gold prices still due to the debt of the past decade?

Against the backdrop of economic uncertainty and escalating geopolitical tensions, gold has become the focus of the market. Has the recent surge in gold prices been too rapid?

In a report on Tuesday, Deutsche Bank pointed out that if the gold market has memory, this year's rise is actually recovering the declines of the past decade, with this year's excessive investment demand offsetting the significant redemptions of gold ETFs in 2013.

Deutsche Bank remains bullish on gold, revising its year-end gold price forecast to $2,400 per ounce and expects it to reach $2,600 per ounce by December 2025.

Deutsche Bank believes that the favorable outlook for gold prices in the future is supported by the situation of U.S. inflation and monetary policy developments, while the geopolitical tensions in the Middle East further underpin the price of gold.

Gold Price Recovers "Lost Decade"

Deutsche Bank's fair value model for gold shows that this year's rise in gold prices is recovering the losses of the past decade.

Deutsche Bank stated:

In a traditional fair value model, we usually index from the actual gold price of the previous period without considering historical errors, resulting in a year-end gold price forecast of $2,400 per ounce and reaching $2,600 per ounce by December 2025.

However, applying a "memory" to the model to assess today's fair value, it can be seen that the devaluation caused by the massive redemptions of ETFs in 2013 (30 million ounces) is now being corrected through central bank purchases in 2022 (28 million ounces in the second half of the year) and further purchases expected in 2024 (estimated at 10-14 million ounces).

While 11 years may indeed be quite long for an investment framework, central banks believe they have an infinite investment time frame. The total underestimation from 2013 to 2021 is approximately $300 per ounce, or 18% of the model's fair value, which is similar to the increase in gold prices since the beginning of the year. The trend in gold prices will mainly depend on the likelihood of investment flows being unwound. We believe that the risk of large-scale selling associated with position unwinding is low, as this trend continues to be consistent with the bullish sentiment of investors.

Multiple Factors Converge to Support Gold Prices

Deutsche Bank also pointed out that inflation and geopolitical tensions are jointly favorable for gold prices:

From the perspective of inflation and monetary policy, the support for gold comes from a "win-win" situation, where inflation remains a major issue, but at the same time the FOMC believes that interest rates are already sufficiently restrictive and the next step will be to start cutting rates. Our revised view on the Fed's rate cut this year (-25 basis points) is less than the market's pricing (-46 basis points), as long as the situation of inflation and monetary policy remains in the middle ground, this may not have much significance.

The Middle East geopolitical conflict is another major support factor for gold prices, as resolving the conflict is becoming increasingly difficult rather than easier, bringing the possibility of future interruptions and supporting the risk premium for gold