'Recession fear' has made a comeback and gold is benefiting, says Goldman

Goldman Sachs Group Inc. says that “fear” has made a comeback and gold is benefiting as stocks slide and investors fret more about the possibility that the U.S. economy may tumble back into recession.

Bullion’s recent advance “happened on the back of the market sell-off and spike in volatility,” analysts including Mikhail Sprogis and Jeffrey Currie, wrote in a report dated Oct. 30. “In our view, it represents a rebound in fear-related demand for gold with ETFs beginning to build after several months of declines.”

Bullion is heading for the first monthly gain in seven after equities slumped and trade-war concerns festered, hurting the outlook for growth. The U.S. has a greater than 50-50 chance of tipping into a recession in the next two years, according to a model tracked by JPMorgan Chase & Co. The spike in market worries on the possibility of a recession have been the primary reason behind a rebound in gold investment demand, according to Goldman.

“While we think that the U.S. cycle still has room to run it doesn’t mean that markets will not worry about it coming to an end,” Goldman said, describing U.S. growth as “still strong”. Still the bank added: “Going forward, we expect market ‘fear’ of a U.S. recession to strengthen. Recession worries and gold investment may increase further after U.S. growth begins to slow down.”

Spot gold traded near $1,227 an ounce on Tuesday. While that’s up 3.1 percent in October, the metal has lost ground in 2018 as the Federal Reserve has pressed on with interest rate rises. Goldman described bullion’s fundamentals as solid, and kept its three, six and 12-month forecasts at $1,250, $1,300 and $1,350, but sees upside risks once U.S. growth begins to slow.

The bank listed other reasons it was positive on bullion, citing prospects for central bank buying, higher core inflation in the U.S., and rising emerging market demand. It cautioned there may be some short-term headwinds related to volatility in EM currencies and the yuan in particular.

Next year the bank’s economists forecast a slowdown in U.S. growth to 2.6 percent from 2.9 percent and a pick-up in core inflation to 2.5 percent, it said. “This could make the U.S. economy look increasingly like it is entering late-cycle inflation overshoot and further support gold investment.”