Goldman Sachs Long Gold, Sees Prices Rising To $2,150

(January 26th, 2022 - Neils Christensen)

Even after a dismal 2021, Goldman Sachs is not ready to give up on gold as the investment banking giant is raising its price forecast and recommending a long gold trade for the year.

In a report published Thursday, the bank said that it is raising its 12-month price forecast to $2,150 an ounce, up from its previous target of $2,000.

The new bullish outlook comes after a disappointing 2021 for gold as prices ended the year down nearly 4%. Goldman said that the decline in gold last year made sense in an environment of strong economic activity and expectations that rising inflation would only be temporary.

"Crucially, high growth and seemingly stable prices led to a surge across all risk-on assets, in particular cryptocurrencies. As a result, not only did gold face falling investment demand from investors no longer looking for a debasement hedge, it faced direct competition in bitcoin as a store of value," the analysts said in the report. "On top of waning investor interest, the divergence in global growth expectations helped support the dollar beyond our expectations."

However, looking to the new year, Goldman said they expect most of the trend from last year to reverse.

"Today, the global growth-inflation mix is markedly different. While there is not yet talk of recession, our economists forecast a material deceleration in U.S. growth, while the imminent prospect of a new hiking cycle is leading to a risk-off environment across long-duration asset classes," the analysts. "For investors looking for a way to hedge their portfolios from risks of a growth-slowdown and falling valuations, we believe a long gold position would be more effective in the current macro environment."

The latest gold comments from Goldman Sachs come ahead of the Federal Reserve's January monetary policy meeting. The central bank is expected to prepare markets for a rate hike in March.

"Contrary to many investors' expectations, gold has remained very resilient during the recent increase in U.S. real rates. In our view, this is due to gold's status as both an inflation-hedging and a defensive asset," the analysts said.

The analysts noted that the growing risk is that persistently higher inflation will force the Federal Reserve to aggressively tighten its monetary policies, which in turn would further weigh on economic growth. Goldman Sachs already downgraded its U.S. growth projections as the U.S. government is unlikely to push forward with its fiscal stimulus plans.

"As U.S. growth continues to slow in 2022, the market perception of recession probability could increase further," the analysts said. "This sets gold up for greater investor interest despite rising rates."

Another factor that Goldman Sachs is watching is the growing inflation threat. Last year, inflation fears were kept relatively in check as the U.S. central bank saw rising consumer prices as transitory. However, the investment bank said there is now a risk that inflation expectations become unhinged as inflation has been more persistent than expected.

"We estimated that if inflation were to structurally move to 4%, gold could hit $2,500/oz based on the historical gold inflation relationship. We also estimated that gold would get somewhere close to this level if U.S. gold ETFs would move back to their 2011 highs. Therefore, we think there is considerable upside potential in gold in a scenario where inflation increases significantly," the analysts said.