Against the backdrop of economic uncertainty and heightened geopolitical tensions, gold has become the focus of market attention. Has the gold price risen too sharply today?

In a report on Tuesday, Deutsche Bank pointed out that if the gold market has memory, this year's rise is actually retracing the decline of the past decade, with excess investment demand this year offsetting the large redemptions of gold ETFs in 2013.

Deutsche Bank continues to be bullish on gold, revising its year-end gold price forecast to $2,400 per ounce, and predicting it will reach $2,600 per ounce by December 2025.

Deutsche Bank believes that the development situation of U.S. inflation and monetary policy will be positive for the future gold price trend, while geopolitical tensions in the Middle East will further support gold prices.

Gold price regains "lost decade"

Deutsche Bank's gold fair value model shows that this year's rise in gold prices is repaying the debt of the past decade.

Deutsche Bank said:

In a traditional fair value model, we typically index from the previous period's actual gold price, without accounting for historical errors, to arrive at a forecast of $2,400/oz for gold at the end of the year and $2,600/oz in December 2025.

However, imposing a "memory" on the model to estimate fair value today yields the depreciation caused by huge ETF redemptions in 2013 (30 million ounces), and only now through central bank purchases in 2022 (28 million ounces in the second half) and expectations for further purchases in 2024 (estimated at 10-14 million ounces) corrected.

While 11 years is indeed a long time frame for an investment, the central bank considers itself to have an unlimited investment time frame. Total undervaluation between 2013 and 2021 is approximately $300/oz, or 18% of modeled fair value, similar to gold price gains year-to-date. The direction of gold prices will mainly depend on the possibility of unwinding investment flows. We believe the risk of a massive sell-off related to position unwinding is low, as this move continues to be consistent with investors' prior bullishness.

Multiple factors stack up to benefit gold prices

At the same time, Deutsche Bank pointed out that inflation and geopolitical situations jointly benefit gold prices:

From the perspective of inflation and monetary policy, gold's support factor comes from "having both", that is, inflation is still a major problem, but at the same time, the FOMC believes that interest rates are restrictive enough and will start cutting interest rates as the next step. Our revised view on Fed rate cuts this year (-25 basis points) is less than what the market is pricing in (-46 basis points), which may not mean much as long as the picture for inflation and monetary policy remains in the middle ground.

Geopolitical conflict in the Middle East is another major support factor for gold prices. Resolving conflicts is becoming increasingly difficult, not easier, bringing the possibility of future disruption and supporting gold's risk premium.