Deutsche Bank Not Bullish Gold (you're next Bitcoin)

Authored by GoldFix ZH Edit

On December 5th, Deutsche Bank AG released a thematic research brief to clients written in part by their respected Head of Global Economics and Research Jim Reid. Here is a summary of that analysis following Sunday evening and Monday morning's events in context of the much bigger historical picture surrounding Gold.

Sunday night, after Gold made fresh all time highs during Asian hours, presumably bolstered by Chinese speculative demand, the bank reminds investors that not only did it achieve this new height, but the yellow metal also experienced a "wild swing" that lead to a 5.5% (GoldFix calculates it as 6.1% from hi-to-lo based on Friday's $2071 close) range on the trading day. One reason for this demand, they cite, is likely based on expectations of central bank rate cuts in 2024.

"The fact that investors are pricing in larger rate cuts for 2024 has increased the relative appeal of something that does not pay any interest.

This all-time high should be seen in some context though, as should the fact that Gold doesn’t pay any interest."

They continue in their CoTD  (Comment of The Day) analysis that; using the real price of Gold going back to 1790, current price is still well below inflation-adjusted ATHs seen in 1980. Since there is no dividend in Gold, they note, that is also the asset's total return.

"Although we have hit all time highs in nominal terms, we are over 20% below the inflation-adjusted peak seen in 1980."

The report argues that while Gold may seem like a good inflation hedge, it only works if you time it perfectly.
Further, for Gold to rally to new ATHs a year after inflation has peaked seems incongruous to its intended use. For comparison, Gold has struggled on a competitive annual ROR basis against both 10yr US Government bonds (3.07 per annum) and US Equities (6.83% per annum) at a seemingly paltry 0.32% going back to the year 1800.

Even looking at gold on a shorter term basis, they argue, starting with the post Gold-Standard fiat era from 1971 onward, gold lags stocks and bonds.

"Even since the fiat "inflationary" era begun in 1971, Gold's real returns are +1.3% p.a., against +2.41% on 10yr Treasuries and +6.53% on US equities. So, the relative performance gap narrows a bit but not decisively."

They conclude when observed statistically, even long term inflationist-types may "still be a bit underwhelmed by Gold as an investment." before acknowledging perhaps Bitcoin has taken some of Gold's thunder in that regard.

With regard to Bitcoin at this point in it's maturity, we suspect they are not too sanguine about it as an inflation hedge-replacement either. But as they remind readers, 'that is for another time'.

It is safe to say, DB is not as bullish Gold in 2024 as some of their peers may have been prior to Sunday night. Given the increased volatility and capitulation-type behavior last week, Gold may not currently be behaving as a backward-looking inflationary hedge and could be more of a forward looking rate-cut play. Something the bank may want you to consider going into 2024, especially if rates are not cut.