Bank of America’s mega-bullish gold call: US$3,000/oz in 18 months

Bank of America (BofA) has jumped boots-and-all into gold bug territory.

The title of the bank’s latest report says it all: The Fed can’t print gold.

BofA analysts have ramped up their already bullish tone about the yellow metal with a new 18-month target of US$3,000 per ounce for the gold price.

That’s a 50% gain on the bank’s previous 18-month target of US$2,000/oz.

And the bank predicts an average gold price for 2021 of US$2,063. At the current rate of exchange, that’s an Australian dollar gold price of A$3,215/oz — a figure that would super-charge profitability for local producers.

However, the bank does allow some caveats that may hold back a rising gold price, including any strengthening in the US dollar, equity market volatility calming down, and weak jewellery demand persisting in China and India.

Gold lovers will be cheered as BofA embraces their own first tenet – acknowledging that gold is “the ultimate store of value”.

Essentially, the bank also acknowledges the argument that money printing debases paper currencies — but that it just increases gold’s value.

Investors will aim for gold with currencies under pressure

The bank expects that, due to the COVID-19 lockdowns, US GDP could drop by 30% in the second half of this year — the steepest drop in modern history.

Japan’s GDP could fall 21.8% in the July-December period, while China has just reported a 6.8% decline in the first quarter of 2020.

Central banks around the world have reacted to the virus shock by expanding their balance sheets to backstop asset values and consumer prices.

“As economic output contracts sharply, fiscal outlays surge, and central bank balance sheets double, fiat currencies could come under pressure. And investors will aim for gold,” the BofA report said.

The US Federal Reserve’s balance sheet as a percentage of GDP could actually double (from 20% to 40%) this year. That balance sheet now stands at US$6.42 trillion, up more than 50% from levels reported seven weeks ago.

Yes, the Fed can print money — but not gold.

Interest rates down for a long time

The BofA report states it can be expected that interest rates in the US and most G-10 economies — that’s Belgium, France, Canada, Germany, Italy, Japan, the Netherlands, Sweden and the United Kingdom as well as the US, along with Switzerland being added in 1964 but the group name remaining unchanged — will likely be at or below zero for “a very long time” as central banks attempt to push inflation back above their targets.

“As central banks and governments double their balance sheets and fiscal deficits respectively, we have also decided to up our 18 [month] target,” the report said.

The report also expects central bank gold buying will decline this year.