Goldman Sachs hiked its gold forecast Friday, calling for the metal to hit $2,000 an ounce in a year due low real interest rates, a weaker U.S. dollar and investor worries about currency debasement in the aftermath of the COVID-19 crisis.
Gold rallied in late March but has had trouble generating further upward momentum since then in a market with offsetting influences, Goldman said. The metal has been held back by what Goldman calls a “wealth shock” to consumers in emerging-market nations and an abatement in central-bank demand. Indian gold imports plunged in April and May, while Russia’s central bank has not bought gold since the collapse in oil prices. However, “fear” about the financial and economic landscape prompted “unprecedented” demand among investors in developed nations, with the volume of gold held by exchange-traded funds up 20% so far in 2020 compared to the same period in 2019, Goldman said.
“Such an unstable environment has raised concerns that, as risk-on sentiment improves with DM economies emerging from lockdown, the pace of DM investment demand will moderate due to less ‘fear,’ while EM ‘wealth’ demand will take longer to recover creating room for a correction in gold prices,” Goldman said. “However, as we have argued in the past, gold investment demand tends to grow into the early stage of the economic recovery, driven by continued debasement concerns and lower real rates. Simultaneously we see a material comeback from EM consumer demand boosted by easing of lockdowns and a weaker dollar.”
As a result, analysts said, they hiked their three-, six and 12-month gold forecasts to $1,800, $1,900 and $2,000 an ounce from $1,600, $1,650 and $1,800 previously. Goldman revised its silver forecasts up to $19 in three months, $21 in six months and $22 in a year, compared to $13.50, $14 and $15 previously.
Goldman estimated that gold-investment demand driven by “fear” in developed markets has risen by 18% this year, while the negative shock to “wealth” has produced an 8% drag. Therefore, a net change of 10 percentage points is in line with gold’s 13% increase in prices so far this year.
Analysts said they expect developed-market demand to remain strong “even as economies recover, supported by fears of debasement and the higher level of economic uncertainty of the crisis.” Further, the bank’s foreign-exchange team expects “material” downside in the U.S. dollar with interest rates back at zero. A weaker U.S. currency can boost the purchasing power of emerging-market buyers, they pointed out.
The bank cited several factors that could mean higher inflation than after the 2008 financial crisis. Analysts listed much larger fiscal and monetary stimulus, better household balance sheets going into the crisis, no tightening in bank regulation/credit standards and less political will for austerity policies.
“We see the economic dislocation of the COVID-19 shock as similar to war, where governments force the reallocation of labor away from the market equilibrium, toward the production of armaments, or social distancing,” Goldman said. “Following World War II, governments were willing to tolerate higher inflation, driven by pent-up demand, in part to help manage their post-war debt loads.”
However, for gold to move materially above $2,000, inflation will need to move above the Federal Reserve’s 2% target with a muted monetary-policy response, Goldman said.
Goldman cited two primary factors behind its upward revision to silver prices.
“First, coordinated global stimulus will help generate growth in industrial production and global economic activity,” Goldman said. “Relative to gold, silver demand is more closely tied to industrial production, accounting for 50% of its demand.Silver also stands to benefit from growing investment in solar power.
“Secondly, we have argued in the past that silver is the precious metal of second choice after gold. This means that when interest in precious metals is moderate, investors may still add to gold but silver often gets overlooked. However, when interest in precious metals is surging (as it is now), a lot of investors historically diversify part of their gold purchases with silver. In this environment, silver can outperform gold because it is a smaller market and moderate relocation into it can lead to a material price spike.”