Credit Suisse has tactical worries about gold, highlights prospect of higher fiscal spending

Credit Suisse advised clients investing in gold and related equities to keep their eye on real, or inflation-adjusted, bond yields instead of on so-called inflation break-evens or nominal yields, calling attention to the potential impact that increased fiscal spending worldwide might have the prices of both.

The broker´s strategy team, led by Andrew Garthwaite, referenced the short-term house view for the gold price to rise to $1,475 per ounce in the final three months of 2016, rising to $1,500 an ounce in the first quarter of 2017, but cautioned that they had "near-term tactical concerns".

"[...] we see a near term risk that real yields may rise: US macro data, US wage growth and the rise in JG yields exert upward pressure on global bond yields. Longer term, easing in the form of ‘fiscal QE’ would probably cause real bond yields to stay low or fall (depending on the degree of monetisation of fiscal expenditure), but nominal yields to rise. In passing, other factors are consistent with a rise in yields," they said.

Indeed, a change in attitudes towards fiscal policy appeared to be taking place globally, pointing to recent government spending packages in Canada and suggestions from top politicians in the UK that spending on infrastructure should be ramped up.

"Elsewhere in the UK, one Conservative leadership candidate – Steven Crabb – and ex-business secretary Javid suggest £100bn of infrastructure spending over 5 years (1.2% of GDP a year), and opposition leader Jeremy Corbyn highlights £500bn of investment spending over 10 years (financed by ‘People’s QE’)."

Reduced fears of financial stability might also rob the 'yellow metal' of some of its lustre; gold had been negatively correlated with banks´ relative performance, they cautioned. Investors would be mistaken to focus on bank credit default swaps instead, they added.

The physical valuation of gold was also "a bit expensive", with the price for an ounce of the stuff just slightly above its 10-year average but more expensive in relation to inflation hedges such as stocks or housing.

A linear regression of the metal´s main macroeconomic drivers (US dollar, real rates, banks’ price relative) suggested it was marginally so, they said.

Shares in related companies weren´t a better option they warned. Indeed, their price had decoupled from the gold price by the most they had ever seen.

They estimated investors in shares were discounting a $1,500 price for gold.

"Gold stocks are clearly no longer cheap on P/B relatives or P/E relatives and they are overbought. Lower quality stocks (bottom third CFROI among peers) have outperformed high quality stocks (top third CFROI)," the strategists pointed out.