Wells Fargo: Gold Price May Soar to $8,000, Currency Depreciation Cycle Not Yet Half

Prior to the outbreak of war between the U.S. and Iran on February 28 this year, gold was one of the most popular momentum assets of the year. However, following the commencement of hostilities, gold prices declined. In March, gold futures fell by nearly 11%, marking the largest single-month drop since June 2013.

Nevertheless, the Wall Street investment bank expects that the "devaluation trade"—whereby central banks worldwide aggressively sell off fiat currencies like the U.S. dollar in favor of more neutral safe-haven assets—could push this precious metal to new heights.

Wells Fargo Securities Chief Equity Strategist Ohsung Kwon wrote: "We are currently in the fourth currency devaluation cycle, which began in 2022."

Kwon added: "Following the recent pullback in gold prices, they are now much closer to our model’s fair value estimate of $4,500 per ounce. All three key drivers suggest that currency devaluation will deepen further from current levels."

This strategist noted that four out of five economic scenarios point toward further currency devaluation, and that as a result, gold prices could reach $8,000 per ounce by 2027. Spot Gold and gold futures are currently trading close to $4,800 per ounce, which means there is still over 66% room for appreciation.

Conversely, Kwon’s pessimistic forecast projects that gold prices will fall to $4,000 per ounce by the end of 2027, a drop of about 17% from current levels.

Kwon applies the M2/gold ratio—the M2 money supply divided by the price of gold per ounce—to identify the current cycle. The analyst noted that the latest devaluation cycle began in 2022, when Russia launched military action against Ukraine and the U.S. began its rate hike cycle, which prompted central banks worldwide to increase their gold purchases.

Previous currency devaluation cycles for gold occurred during: the Great Depression; the "Nixon Shock"—when then-President Richard Nixon ended the U.S. dollar’s convertibility to gold—and the subsequent stagflation era; the War on Terror in the early 21st century; and the subprime mortgage crisis.

Kwon further stated that currency devaluation cycles last an average of 8.5 years, and the current cycle—at just 3.5 years—has yet to reach its halfway point.