Commerzbank Expects Gold Prices at $1,500 by the End of 2019
Big banks are becoming gold bugs, which could be great for gold prices. If you have ignored the yellow precious metal for the past few years, now could be a good time to start paying attention.
Just look at what Commerzbank AG (ETR:CBK), a leading bank in Germany, is saying. The bank is not really buying into the argument that we often hear, that higher interest rates are going to be bad for gold.
“The Fed’s signaled rate hikes will bring its interest rate close to a level that is considered neutral next year. The Fed is hardly likely to go much above this so long as the U.S. economy does not overheat,” said Commerzbank. (Source: “Commerzbank Sees $1,350 Gold, $18 Silver By Year-End,” Kitco Metals Inc., June 22, 2018.)
The bank added, “In the past, the market has tended to anticipate the end of the rate hike cycle considerably earlier. In 2006, the gold price began making noticeable gains already six months before the last rate hike. The debate on the approaching end to Fed rate hikes should drive gold up to $1,500 per troy ounce by the end of 2019.”
In other words, the interest rate hikes by the Federal Reserve may give a boost to gold prices, and $1,500-per-ounce gold by the end of next year is likely.
If gold does go to $1,500 by the end of 2018, that would be an increase of more than 18% from where the prices stand now.
Commerzbank is not the only big bank turning bullish on gold. The list of banks saying that the price of gold could go higher is getting bigger by the day.
Mind you, big banks turning bullish is not surprising news at all. We have been saying this all along at Lombardi Letter.
Why Do Big Banks Matter?
Big banks’ analyses are closely followed by investors who have deep pockets and the ability to move the markets—be it by hedge funds, mutual funds, pension funds, or other institutional investments.
Back in 2013, it was the big banks turning bearish on the yellow precious metal that led to the sell-off in the gold market. Investors followed their advice and sold gold.
So, if big banks are becoming optimistic about gold now, it’s possible that this will drive institutional investors toward the gold market. They haven’t been fans of gold over the past few years, so the current phenomenon could give a boost to gold.
If Gold Prices Jump 18% or More…
If we assume that the price of gold will jump 18% in the next 18 months, it’s critical to watch mining stocks. In that scenario, holding gold bullion would give you a gain of 18%, but holding mining company shares could offer much bigger rewards.
Consider that Goldcorp Inc. (NYSE:GG) produces an ounce of gold for all-in sustaining costs of $810.00 an ounce. So, with gold currently at $1,275, the company’s gross profit is around $465.00 per ounce.
Here’s the thing: Goldcorp, like many other mining companies, is planning to reduce its costs. Low gold prices have forced it to become a better business.
Assuming that Goldcorp is able to reduce its costs to $750.00 per ounce by the end of 2018, and the price of gold reaches $1,500 per ounce, the company’s gross profits could soar. That’s a massive improvement, and you can bet that the GG stock price would reflect it by going higher.
Please note that this is not a recommendation to buy, just an example of how rapidly mining shares could see their profitability jump. If gold prices go 18%–20% higher than their current levels, we could see several mining stocks double in value very quickly.