How high does gold need to rise before it is considered excessively high?

How high does the gold price need to rise to “fizzle out”? Morgan Stanley believes the theoretical limit is $8,400.

Amidst a major upheaval in the metals market, Morgan Stanley commodity analyst Gregory Shearer and his team released a new research report. While reaffirming a year-end target price of $6,300 per ounce, they also proposed a quantitative framework for identifying the peak of gold prices.

The bank believes that the medium-term framework for gold is rooted in “demand tonnage.” Because short-term supply of gold is extremely inelastic, when demand surges, gold prices must rise to attempt to restore market balance.

Gregory Shearer wrote:

“In the absence of changes in investor and central bank buying willingness (i.e., nominal capital inflows), only when prices rise enough to convert the same nominal demand impulse into a sufficiently low tonnage will market imbalances that push prices higher dissipate.”

In other words, the mission of rising gold prices is to “allow the same amount of money to buy less gold,” until physical demand drops to a level that supply can cover. Morgan Stanley’s answer is: “Before investor and central bank appetite weakens, this price may need to exceed $8,000 per ounce.”

380 Tons: The ‘Break-even Point’ for Gold Price Rises

To turn the theory into a forecast, Morgan Stanley conducted a regression analysis of quarterly demand tonnage from central banks and investors against changes in gold prices.

Data mining shows that physical demand from these two channels must exceed 380 tons each quarter for the gold price to rise in that quarter.

This conclusion has a very high degree of historical stability — a long-term regression analysis starting from 2010 yielded nearly the same break-even level (about 376 tons).

$8,400: The Theoretical Top Under Nominal Demand

From an investor’s perspective, the most straightforward calculation is: How high does the gold price need to go for the current amount of capital to no longer be able to buy 380 tons of gold?

Morgan Stanley data shows that over the past two quarters, nominal demand from investors and central banks averaged slightly above $100 billion. Assuming this nominal capital remains unchanged, a simple division leads to the conclusion:

“The gold price needs to rise to about $8,400 per ounce to bring the tonnage data below 380 tons — which is the threshold historically required to sustain price increases.”

Morgan Stanley admits this is only a limited heuristic model that does not consider changes in jewelry demand and scrap gold supply. However, the bank emphasizes that the conclusion is clear:

“While the air above gets increasingly thin as gold prices rise, we believe that currently, there is no risk of a structural gold rebound ‘collapsing under its own weight.’”

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