Goldman said it anticipates the metal will eventually make another leg higher in a scenario that resembles a pause followed by gains during the 2008-09 financial crisis.
Gold has been mostly range-bound for the last two months after initially falling this spring when investors were selling assets across the board to raise cash when stocks collapsed due to the COVID-19 pandemic. However, gold then bounced back when governments and central banks launched massive stimulus programs.
The metal eventually turned sideways when so-called risk assets bounced, but with gold holding up due to U.S. dollar weakness and low long-term real interest rates, Goldman said in a report Tuesday.
“The situation resembles the first half of 2009 when despite continued economic recovery and higher stock prices, gold and real rates remained range bounded as the Fed maintained ultra-easy monetary policy,” Goldman said. “Eventually gold broke out higher in Q3 2009 in line with the move lower in real rates as inflation expectations increased outpacing [a] rise in nominal rates. We believe that a similar dynamic can play out today with the repricing of inflation expectations being the catalyst for a move up in gold.”
Gold also may be underpinned as emerging-market economies reopen, Goldman continued. Analysts said the gold premium in China has already returned to pre-crisis levels, suggesting normalizing demand.
“All in all, we believe that gold should withstand the near-term cyclical rotation expected by our strategist and continue to expect it to reach $1,800/toz on a 12m [12-month] basis,” Goldman said.
Just before 9 a.m. EDT, spot gold was at $1,722.70 an ounce, up $8.10 for the day.
“While it is not our base case, we see the tail risk of above-target inflation as a potential driver for gold prices beyond $2,000,” Goldman said. “While the Fed maintains a dual inflation-output mandate, from 2009-11 they proved willing to tolerate above-target inflation in the short term in order to aid the labor market’s recovery. Such a cyclical dislocation between break-even inflation and nominal rates could further drive real rates down and gold prices up.”
Meanwhile, Goldman hiked its copper forecast, citing a pickup in demand from No. 1 consumer China that may well erase a previously expected supply surplus for 2020. As a result, Goldman now looks for copper prices to be at $6,000 per metric ton in three months, up from its prior forecast of $4,400. The metal is now seen at $6,500 in 12 months, up from the previous outlook of $6,000.
Aluminum likely will finish 2020 with a supply surplus, Goldman said. “However, we believe the worst has been priced in and sequential improvement in aluminum demand is set to continue…,” Goldman said, hiking its three- and six-month forecasts to $1,700 and $1,800, respectively, from $1,400 and $1,700 previously.
Author: Allen Sykora