UBS Recommends Buying Gold…BNP Paribas – Selling

Recently, a few important investment banks released interesting recommendations about the gold market. What can we learn from them?

The Union Bank of Switzerland (UBS) warned investors that the seven-year cycle in equities is rolling over. So, UBS recommends buying gold, as its price is likely to bottom in 2016.

“Gold has been trading in a cyclical bear market since 2011. In 2016, we expect gold and gold mines moving into an eight-year cycle bottom as the basis for the next multi-year bull market. Initially, we see gold profiting as a safe haven and as of 2017, gold could profit from the US dollar moving in a major top and starting a bear market. A potential bottom in 2016 bottom could be a rather powerful bottom, since together with a four-year cycle low we have also an eight-year cycle low projection for this year. In this context we expect a potential 2016 low in gold to be the basis of a new multi-year bull market.”

The Royal Bank of Scotland (RBS) is even more bearish regarding the stock markets. The bank warned its clients that 2016 could be a “cataclysmic year” and recommended “selling everything”. RBS did not mention gold in its report, but in such a doomsday scenario, gold should shine. Albert Edwards working at Société Générale echoed RBS’s worries, saying that “developments in the global economy will push the US back into recession. The financial crisis will reawaken”.  He also did not mention gold, but the implications are clear: buy gold, as it is a safe-haven asset.

On the other hand, BNP Paribas lowered the forecast for gold, calling for a three-digit price of gold. The deflationary pressure will reinforce gold’s secular downtrend. The bank sees gold averaging $960 in 2016 and $860 in 2017. Other major banks, like Goldman Sachs or Bank of America are also expecting the gold price to trend lower in 2016 (and even reach a triple-digit number).

Who is right? In some sense, both sides are right, since they predict that the price of gold could continue its downtrend in the current year. However, UBS forecasts the bottom in 2016. We incline towards this opinion, as we see more negative risks for the U.S. economy and, thus, more potential upside for the gold market. BNP Paribas and other banks base their bearish outlook on deflationary pressures and a rise in the U.S. interest rates. It is true that the price of gold is highly correlated with U.S. real interest interests, therefore the lack of inflation and the Fed’s hike are bearish for gold. But U.S. real interest rates remain low and have been declining since December. We are also skeptical about the U.S. central bank tightening its monetary policy further in the current economic environment. So far this year, the UBS seems to be right: stocks are down, gold is up, but there are many unknowns. Stay tuned, we will be monitor the gold market closely.

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Arkadiusz Sieron

Sunshine Profits‘ Gold News Monitor and Market Overview Editor