Gold and fair value: a catastrophe is unlikely

XAU/USD

Key zone: 4,600.00-4,750.00

Buy: 4,750.00(on a pullback after retesting the 4.650 level); target 4,950-5,100; StopLoss 4,650.00

Sell: 4,550.00(on strong negative fundamentals); target 4,350-4,200; StopLoss 4,650.00

Gold continues to rise amid risks related to Greenland and bets on interest rate cuts.

The short-term “fair” price of gold, calculated by the Bloomberg Intelligence model, is only $2,500 per troy ounce. The gap between the model price and the market price exceeds $2,100, compared with an average gap of $490 last year.

At the same time, a narrowing of this spread — that is, a decline in the market price of gold — is not expected at the moment.

Reminder:

Fair value is a model-based estimate of gold’s price derived from fundamental variables:

• real interest rates;
• inflation expectations;
• dollar dynamics;
• macroeconomic and geopolitical uncertainty;
• structural demand (central banks, jewelry, industry).

This is the price level at which the balance of fundamental factors is neutral, without extreme risks or positioning distortions. The further the price moves away from fair value, the more aggressive corrections become — but also the faster they tend to be bought.

Today, the market is trading significantly above fair value, forming an expanded risk premium, and this premium may persist for quite some time.

The current “overpriced” level of gold is explained by the traditional defensive role of the precious metal in periods of elevated risk, as well as by growing investor interest in commodities as a means of portfolio diversification.

Monetary authorities are also participating in this race: for example, the Swiss National Bank earned $33 billion over the year on gold’s rise.

Taken together, these factors — combined with uncertainty over future Federal Reserve policy, especially after a change in leadership — are steadily pushing gold into the zone above $5,000 per ounce.

Over the long term, such a gold price looks unstable. A fundamental justification for this level would require the U.S. Economic Policy Uncertainty Index to surge to 650 points from the current 211 (i.e., more than triple), as well as the Geopolitical Risk Index to rise to 400 points from the current 200 (i.e., double).

Even under Trump’s extreme economic policies, this would be far above current levels.

So what is the result?

The fair value of gold is almost twice as low as the market price. The further the market price exceeds fair value, the higher the risk of impulsive sell-offs — and the more important profit-taking and trailing stops become.

Everything above $2,500 is therefore speculation and a premium paid for market fear. As long as fear remains active, the bullish trend persists, and capital will remember real fundamentals only once panic leaves the market.

However, calm conditions should not be expected in the market anytime soon.

So we act wisely and avoid unnecessary risks.

Profits to y’all!