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Deutsche Bank: No 1980 redux, gold rout mostly over

Ronald Reagan had to deal with short-term rates of 20%

The spot gold price made a nice move higher early Monday as traders capitalize on improved sentiment and a major bullion bank said the gold rout may have run its course.

In early morning trade the yellow metal was trading not far off its highs at $1,232 after gaining as much $20 or 1.65% in the first couple of hours of regular trading in New York.

The gold price is down 26% this year and trading near 3-year lows after dramatic falls in April saw the gold price drop $200 over a matter of days, but at least one investment bank believes the worst is over for gold bugs.

MarketWatch quotes a research note from Deutsche Bank out on Monday saying the “major part of the gold price correction has already occurred”:

“Lessons from history suggest that although gold-price losses have been extreme, the extent of the price correction today is still some way short of the percentage declines that occurred in 1980-1. However, we would classify events over 30 years as significantly different since at that time, U.S. short-term interest rates rose to 20% with real interest rates also rising rapidly.”

Other investment banks are less bullish. Goldman Sachs says bullion should reach $1,050 by the end of 2014 while Credit Suisse anticipates a move down to $1,150 by this time next year. Danske Bank, the most-accurate gold forecaster tracked by Bloomberg over the past two years, predicts $1,000 within three months.

The most volatile year for the gold price was 1980 – the London PM fix was the benchmark price at the time – when the metal’s highs and lows were 40% apart following the 21 January 1980 record of $850 a ounce.

Just like the pullback in August 2011 when the price fell $105 in a single day shortly after reaching the all-time high above $1,900, in 1980 gold fell also precipitously after setting the record – within two days it fell back to under $700.

By March of that year gold was changing hands for less than $500 an ounce; the beginning of a bear market that lasted  two decades.

Gold breached $850 again at the start of 2008, but in inflation adjusted terms the 1980 price is still the highest ever – gold would have to hit some $2,400 an ounce to set a record in today’s money.