Both national and international oil companies have slashed CAPEX and maintenance spending, which will push up decline rates and US shale drillers finally focus on profitability instead of growth. Current longer-dated oil prices are too low to give enough incentive to oil companies to invest in badly needed future oil production. When they finally rise, gold prices will be pushed sharply higher.

In our gold price framework, we identified three main drivers for gold prices:

central bank policy (through real-interest rate expectations and QE),

changes in central bank inventories and

longer dated energy prices.

We found that these three drivers have a very high predicting value for gold prices over the past decades. When prices under- or overshoot the model predicted values, they tend to correct in the medium term. Current prices are well in line with the model-predicted prices

We have discussed our outlook for the first driver at length in recent reports (see Gold price framework update – the new cycle accelerates, January 28, 2021, as well as The equity-gold price conundrum – Part I, March 8, 2021 and Part II, March 19, 2021.

Our outlook for the second driver – changes in central bank inventories – remains the same as it has been for the past years: Central Banks in emerging markets remain net buyers of gold, more than offsetting the still ongoing (but much slower) trend of Western central banks being net sellers. More importantly, and as we have highlighted before, central bank purchases have not been a strong contributor to gold prices for the past years, neither to the downside nor to the upside.