Goldman Sachs says buy gold. Right now!
The Wall Street Journal Online quotes from a Goldman Sachs research note on the prospects for the gold price on Wednesday.
The investment bank argues that gold is not a good long-term investment, but offers a compelling medium term trade.
My the middle of this year Goldman expects a gold price of $1,785 an ounce. Six months out it sees gold trading for $1,840 an ounce and March 2013 bullion could be changing hands for $1,940/ an ounce.
Goldman bases its forecast on the correlation between the gold price and real interest rates in the US:
Gold prices remain too low relative to the current level of real rates. Under our gold framework, US real interest rates are the primary driver of US$-denominated gold prices. However, after being remarkably strong in the first half of 2011, this relationship broke down last fall, with gold prices falling sharply in the face of declining US real rates, as tracked by 10-year TIPS yields. While gold prices have returned to trading with a strong inverse correlation to US real rates since late December, at sub-$1,700/toz they remain below the level implied by the current 10-year TIPS yields.
The gold market’s expectation that real rates would be rising along with economic growth may help explain this valuation gap. We believe that despite last fall’s decline in 10-year TIPS yields, the gold market may have been expecting that real rates would soon be rising along with better economic growth, leading to a sharp decline in net speculative length in gold futures. Accordingly, a simple benchmarking of real rates to US consensus growth expectations suggested a level of +40 bp by year end. Our models suggest this higher level of real rates would be consistent with the current trading range of gold prices. As we look forward, our US economists expect subdued growth and further easing by the Fed in 2012, which should push the market’s expectations of real rates back down near 0 bp and gold prices back to our 6-mo forecast of $1,840/toz.
Gold futures trading on the Comex division of the New York Mercantile Exchange traded down more than $20 an ounce by lunchtime on Wednesday.
Gold for June delivery changed hands for $1,666 an ounce after failing to breach the $1,700 an ounce level on Tuesday.
While gold may be a good speculative buy at the moment others are pointing to some bearish fundamentals in the physical market. The Financial Times pointed this out last week:
The US Mint’s sales of American Eagle gold coins, seen as a good indicator of investor sentiment, fell in February and March to their lowest level since mid-2008, down about 70 per cent from last year. Open interest in gold futures on Comex in New York is close to a 2½-year low.
More worryingly, traders say, the physical markets Asia and the Middle East, which have traditionally provided a backstop to gold when prices fall, are also quiet. In India, historically the largest consumer of physical gold, the government last Friday announced it would double taxes on gold imports, triggering outrage among the country’s jewellers, who closed their shops this week in protest.