Home » Price forecasts for gold and stocks: These key figures help to determine the price | 03/02/24

Price forecasts for gold and stocks: These key figures help to determine the price | 03/02/24

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Price forecasts for gold and stocks: These key figures help to determine the price |  03/02/24

Investors may often find it difficult to make the right decision regarding their investment behavior. These simple formulas can help stock and gold investors better understand price developments and make their own price forecasts.

• Gold price forecasts depend on real gold prices
• EPS and P/E ratio are important indicators for calculating share prices
• Beware of overpriced assets

Gold price is calculated from the inflation index and the real gold price

Private investors are often faced with many questions about their investment behavior. As Patrick Herger from the “Neue Zürcher Zeitung” now reports, simple formulas can help investors better understand share price developments and the price of gold. There are different factors between the two assets that investors should consider. The special thing about investing in gold – especially compared to investing in stocks – is generating profit. While with stocks it is possible for the companies concerned to distribute profits, gold investors can only sell their holdings to make profits. How high this profit is depends on how much potential buyers are willing to spend on it. However, the price of gold can be calculated by multiplying an inflation index by the real price of gold. With the increase in the inflation index, an increase in the price of the precious metal is also justified. According to Herger, if the price level increases by ten percent, the price of gold should also rise by ten percent.

Gold ETFs amplify price movements

In order to make forecasts for the gold price, the real price of gold must be taken into account. To get this, the gold price is divided by the inflation index CPI. Based on this calculation, the price of real gold is currently similar to that in 1980 or 2011, says Herger. In these years, investors expected strong inflation, but this did not materialize and caused the price of gold to plummet. Herger explains the current high on the one hand with renewed expectations from investors that inflation will occur, but also with gold ETFs, which reflect the development of the gold price and have been responsible for the purchase of large quantities of gold in recent years. This has driven up the price of gold. Nevertheless, Herger warns that although gold ETFs increase price movements in the gold price, a renewed lack of expectations of strong inflation could push the gold price even lower than has been the case in the past.

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Earnings per share and price-earnings ratio

Herger also has formulas for calculating stock prices. Two key figures are important here, namely the profit per share, also known as “earnings per share” or EPS for short, and the price-earnings ratio (P/E ratio). EPS indicate how much of a company’s profit comes from a single share. The P/E ratio is obtained by dividing the current price of a stock by the earnings per share. Conversely, you get the share price if you multiply EPS and P/E ratio together. Now there are two reasons for rising stock prices: Either the company’s profit and thus the earnings per share increase, but the P/E ratio remains the same, or the profit remains stable and the P/E ratio increases. Herger gives two examples to illustrate the formula. In the first case, he assumes a company that has a profit of 10 francs and a low P/E ratio of 10. This gives you a share price of 100 francs. With a constant annual profit of 10 francs, an investor’s total profit corresponds to his investment after a period of ten years. In the second example, Herger names a company that also has a profit of 10 francs per share, but a P/E ratio of 30. Here an investor’s investment would only correspond to his profit after 30 years.

Consistent profits unlikely

However, it is very rare for a company’s profits to remain the same over the years, as Herger emphasizes. Additionally, investors may accept a higher P/E ratio if higher growth is expected. Herger explains a variation of his second example, in which the fictitious company has a rapidly growing profit and has already reached the purchase price of 300 francs after ten years from the start of the investment. However, a long-term and reliable forecast of growth is not possible. Herger points to a study by economist Alex Coad from the Center d’Economie de la Sorbonne in Paris, which states that the growth of a company in the long term is determined by chance. A reliable forecast is also made more difficult by optimistic and often overestimated valuations on the markets. Therefore, cautious investors are more likely to turn to stocks whose prices increase due to an increase in earnings, not due to a higher P/E ratio.

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While the inflation index is a factor in the price of gold rising, profits drive the prices up for stocks. The P/E ratio serves as an indicator of the optimistic attitude on the markets. Nevertheless, both a high real price for gold and a high price-to-earnings ratio should ring alarm bells for investors, as this could be a warning signal for overpriced assets. So-called buy-and-hold investors are currently exposed to an increased risk of not achieving price targets in the long term.

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