Credit Suisse (Credit Suisse) believes that gold may be undervalued in terms of strict fundamentals. In addition, with the constant risk of runaway central banks and market collapses and the explosive growth of the global money supply, it is time to buy gold stocks as a risk diversification tool. The agency expects gold prices to rise by at least 7% in the future.
According to Andrew Garthwaite, a global equity strategist, the 12-month rolling price-to-earnings ratio of gold stocks is unusually cheap (25 per cent compared with the broader market, compared with a normal premium of 30 per cent), and the price-to-book ratio is also cheap relative to the broader market.
As for gold itself, credit suisse points out that the ratio of gold to silver or industrial commodities is also at the bottom of the 10-year range, with real prices adjusted for inflation 20 per cent below their 2011 peak.
Upward potential of gold price
According to the Credit Suisse model, gold prices are driven by TIPS (inflation protected bonds) yields and the dollar. Given the current decline in TIPS yields (seen as real interest rates) and future trends, combined with structural bears on the dollar, Credit Suisse believes gold has 7 per cent upside potential.
In terms of strict fundamentals, gold is likely to be undervalued and there is always a risk that central banks are out of control and markets collapse. Gold can solve the problem of risk hedging. As Garthwaite wrote, "Gold is a hedge against extreme financial deleveraging", adding:
"the levels of government debt, deficits and corporate debt are very high. We still believe that if the TIPS yield is well above zero, it will start to raise concerns about the debt trap, which could lead to large-scale safe-haven trading. This could prompt the Fed to react by driving down real yields (and devaluing the currency). "
In addition, gold can also hedge against the explosive growth of the global money supply:
"We believe that this will also lead central banks to buy more gold because currencies are depreciating. The central bank accounts for 12% of gold demand. According to our calculations, if all central banks together hold more than 10% of gold, then gold demand will increase 1.6 times. "
Finally, Credit Suisse believes that the technical side of gold also hints at the possibility of an upside breakthrough.
