Several days ago, on February 19, Citi bank, one of the biggest financial institutions in the world has issued a gold price forecast saying that the so-called safe-haven asset will reach $2000 per ounce in the next 12 to 24 months. As the reasons behind the rally, the firm's analyst Aakash Doshi mentioned potential global slowdown as the fears about the coronavirus outbreak could rapidly spread around the world.

“With STIR [short-term interest rate] markets pricing in ~1.5 Fed cuts in 2020 and global growth risks skewed to the downside, gold is a direct beneficiary of the low nominal and negative real yield environment,” Doshi said while adding that gold can also

“outperform on a risk market unwind should coronavirus risks impact supply chains and thus US earnings momentum.”

What he meant is that the yellow metal gains when real interest rates (adjusted for inflation) are falling below 0. In the bonds world, when rates (yields) are negative, it means that they provide a guaranteed loss if they are held until maturity. On the other hand, we can say that the so-called barbarous relic bears zero-yield as it does not provide any fixed income (think about currency with zero interest rate which never moves). Therefore its price in the periods when inflation rises or interest rates fall, especially when inflation exceeds the rates. As a graphic illustration of this phenomenon let's consider one of my recent tweets:

As you can see the total value of negative-yielding global bonds is currently close to $14 trillion. or almost 25% of the world developed bond market ($58 trillion market capitalization). Thus, if 25% of bonds (considered as safe assets) guarantee a loss it is not surprising that capital flies to gold. It is better to earn 0% than -1% for example.

This interesting behavior have been initiated only a few years ago, as the first negative-yielding bonds have appeared in 2014. The chart below shows that the correlation between the metal price (blue) and the total value of negative-yielding debt (red) has held pretty well over the last years.

Since that relation may be considered as pretty fresh, risky and maybe unsustainable (which I doubt in case of falling rates even further), let's bring another important factor which shows a longer perspective, real US 10 year treasury yields. Real means adjusted for the level of inflation.

The yellow line on the graph shows the gold price while the blue line 10-year Treasury Inflation-Protected Security (TIPS) yield, which is simply a 10-year US Treasury Bond yield minus inflation rate (Consumer Price Index). From the graph, we can conclude that both lines have a strong inversed correlation. When the 10-year real rate moves down then the precious metal price rises. The move in a gold price is even more prevalent when the yield goes negative (money lose if the bond is held till maturity). Recall again that the gold is a sort of currency with zero interest rates, so the higher the negative real rates the higher the price of gold. This graph perfectly shows this dependency.

I believe that over this business cycle the barbarous relic has been influenced the most by the aforementioned two factors. Find out, therefore, what would have to happen to make a gold price rise to as much as $2000 per ounce.

The case for $2000 per ounce for gold

The most favorite precious metal in the investment world neither release earnings nor give future performance guidance as companies do. How then approximately estimate its future value? Considering the first aspect, I used simple maths. From the graph showing gold and the negative-yielding debt, we can see that roughly $10.5 trillion increase in the total value of negative-yielding bonds has been an equivalent of $400 increase in a gold price. Nowadays, the total value of negative-yielding debt is roughly $13 trillion with the gold price of $1650 per ounce. Thus, we need a rise of 9.2$ trillion in value to a total of 22.2$ trillion or an equivalent share of 38% of all developed-countries bonds. This is quite a realistic scenario but the correlation must still hold. If the value of both will increase to such a level over time the correlation may somehow decrease as there will be also other aspects to consider. What about the 10 year real yields then?

This would much more difficult to estimate. In 2012 when the gold price was at almost $1800 level the real 10-year yield was -0.79%. However, when the price reached an all-time high of $1985 the real yield was -0.03%. higher level than today (-0.09%). As I mentioned earlier, the upside price movement in gold is more substantial when the rates are deeper in the negative territory.

At this point, I would like to show you a 10-year treasury yield over a longer period of time, starting in the late 80s' in order to understand the long term trend.

The trend is clear (purple channel), the yield has been falling due to demographic forces (higher need for savings), globalization, technology, and central banks' activities. If you wonder, why in 2018 the yield has breached the channel to the upside it was the effect of the Fed rates increases, as well as the assets, unwind on their balance sheet which led to an equivalent of 6.25% short-term rates increase. As a result, the Bond Market had to respond. I believe that the current trend will continue and in the medium term, it will be accelerated by the global economic slowdown.

Assuming that inflation will stay at roughly the same level while using a conservative approach a 10-year yield will need to fall 0.70% to let the real yield reach an all-time low. According to my estimation if the 10-year US yield falls by 1% it will be enough for gold to reach $2000 per troy ounce.

How much time it could take to achieve that? Putting into perspective, from the end of 2018, it took only 7 months to lower the 10-year rates by 1% from 3.1% to 2.1% after central banks around the world have started to dramatically ease their policies again. Having said that 12-24 months horizon to reach the price of $2000 in gold is not an impossible scenario if the current economic conditions persist.

If you look once again on the graph, it can be seen that a 10-year yield is flirting with its all-time lows. Who knows if the break of this level will not exacerbate the move to the downside and like the effect, we'll not see the yellow metal breaching $2000 in the next 6 months?

On the flip side, it is also important to consider what could cause the bond yields to start picking up, at least in the medium term? Improving economic conditions, not only in the US but globally as the effect of massive fiscal (government spending) and monetary (central banks cuts and printing) stimulus. The problem is that with the recent coronavirus outbreak we will probably see more economic problems. We have to understand that economic shocks do not happen overnight like in the case of financial markets. They gradually develop throughout the global economy causing more severe and longer-lasting problems. I wrote about that in my previous articles.


No matter whether you are a gold bug (I am not) or not. This asset is definitely worth considering as part of the investment portfolio. It provides a real hedge in the environment of historically low rates as well as the currencies value debasement. In terms of the latter, for your curiosity, I leave you with this graphic showing the gold price reaching historical record prices in different currencies.

source: Bloomberg,

Black - Pound, Yellow - Euro, Green - Canadian Dollar, Purple - Australian Dollar, Red - Japanese Yen, Orange - Chinese Yuan. It is nothing surprising, having in mind that the dollar has been strengthening versus the global currencies over the last two years due to the global economic slowdown and insanity conducted by the central banks (easy policies lead to further currencies weakening). It points to a very important conclusion. If you'll ever want to buy gold focus on your local currency instead of the US dollar.

A final word. Before you rush to buy gold after reading this article I urge you not to do that. I would like to emphasize to never buy any assets that you don't fully understand. Having said that, I first recommend to conduct a comprehensive analysis and to build your own opinion because there are many different factors affecting an investment process such as for example timing.


Writing about the timing, after the recent rally (see the chart) I expect gold to consolidate a little bit and even touch $1600 and then if the economic environment will not change dramatically the barbarous relic should start to gradually increase again.

Wish you all the best,


Disclaimer: This content includes only personal opinion and that should not be considered professional financial investment advice.