Goldman Sachs sees gold prices hitting $2,500/oz by year-end

Earlier in January, Goldman Sachs had raised their 12-month gold price forecast to $2150 an ounce on the view that an impending US growth slowdown would lead to increased concerns of a US recession

Gold prices have surged nearly 18 per cent thus far in calendar year 2022 (CY22) to around $2,050 per ounce in the backdrop of the ongoing Russia – Ukraine conflict and there is more headroom over the next few months, believe analysts at Goldman Sachs, who expect the prices to rise another 25 per cent to $2,500 an ounce by the year-end.

Earlier in January, Goldman Sachs had raised their 12-month gold price forecast to $2150 per troy ounce on the view that an impending US growth slowdown would lead to increased concerns of a US recession and incentivize 300 tons of inflows into gold ETFs.

At the beginning of the Russia Ukraine tensions, Goldman Sachs had suggested that the resulting rally in commodities could further deteriorate the developed market (DM) growth inflation mix, increase concerns of a US recession, and push gold ETF inflows to 600 tons and, in turn, push the gold prices to $2,350 an ounce in 12-months. This scenario, it said, is now becoming the base case.

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“The last time that we saw all major demand drivers accelerate simultaneously was in 2010-2011 when gold rallied by almost 70 per cent. Given the material upward revision in investment and demand assumptions, we now upgrade our 3 /6 / 12-month gold targets from $1950/2050/2150 an ounce to $2300/2500/2500 per ounce,” wrote Mikhail Sprogis, Sabine Schels and Jeffrey Currie of Goldman Sachs in a recent note.

Gold ETFs, Goldman Sachs believes, are building aggressively for the first time since 2020. "This momentum is only set to accelerate as our Strategists think the market has not yet priced in a US growth slowdown, which our economists believe is needed to curb inflation," it said.

That apart, Goldman Sachs believes gold’s typical negative relationship with real rates would break down as they become a poor barometer of fear when the US Fed is hiking rates. "As we found in the past, gold prices tend to rally during Fed rate hiking cycles," the note said. GRAPHIC: GOLD & FEAR OF RATE HIKE

Another fallout of the Russia-Ukraine conflict, Goldman Sachs said, will be that Russia will not only not sell its gold reserves but will likely return to being a large gold buyer after the Ruble stabilises. Given Russia’s experience with forex reserves, it is possible that other countries may prefer to hold a larger share of their reserves in gold over the long run as well, it said.

Central bank & retail demand

In the second half of 2022 (H2-CY22), Goldman Sachs expects the gold demand by central banks to reach its historical high level as they globally have both strong diversification and geopolitical reasons to shift reserves into gold.

“We expect that by the second half of 2023, global central bank demand hits a record 750 tons annual rate versus 450 tons in 2021. This, together with an upward revision in our ETF build forecast should push year-end gold prices to $2500 per troy ounce,” the note said. CLICK HERE FOR A GRAPHIC ON CENTRAL BANK DEMAND

Besides the central bank demand, Goldman Sachs expects the retail demand, too, to remain robust across Asia going ahead in the backdrop of a strong economic recovery and lack of investment options. 

“China is stimulating its growth and India is benefiting from a Covid infection recovery and not yet tightening monetary policy. In Q4-2021, gold consumer demand reached the highest level since 2013. In China, property prices are falling and equities were impacted last year by regulatory tightening. At the same time, interest rates in both India and China remain near historical lows in an environment of high inflation,” the report added.

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