Gold prices are expected to break out of the current narrow trading range and soar through 2021 as the coronavirus recession gives way to higher inflation, analysts at Goldman Sachs say.
Bullion hovered around $1,900/oz over the past few weeks after its summer rally to record highs fizzled out. While uncertainty surrounding the US election fueled a brief rally, positive news of covid-19 vaccine trials have pushed investors out of safe havens and into riskier assets.
Spot gold declined 0.3% to $1,873.08/oz by 1:50 p.m. ET Wednesday. US gold futures were down 0.6% to $1,872.60/oz in New York.
In the near term, gold doesn’t have a clear catalyst to lift or drag on prices, analysts Mikhail Sprogis and Jeffrey Currie say. Yet, the precious metal is poised to break out in 2021 as inflation concerns take center stage, they add.
Goldman has set a $2,300/oz price target for gold, which equates to a 22% rally from current levels over the next 12 months and another all-time high.
Gold prices typically fall when interest rates climb, but the 2008 recession showed the market focusing more on short-term rates. Even as longer-term rates moved higher, gold rose in the wake of the financial crisis as concerns around policy-fueled inflation lifted demand, according to Goldman.
The metal will follow the same path next year, Goldman analysts say. The Federal Reserve has indicated it will allow for a temporary overshoot of its 2% inflation target after a prolonged bout of weak price growth. Goldman’s economics team sees inflation rising to 3% before weakening through year-end.
“This may well lead to market participant concerns over the long-term inflation rate and more inflows to gold in order to hedge it,” the bank’s analysts say.
Expectations for a weaker dollar also support a disconnect between gold prices and long-term rates, the team adds.
Analysts at HSBC echoed the same sentiment, stating that the long-term outlook for gold remains positive, despite further downward pressure in the immediate term due to the vaccine breakthroughs.
“The broader economic climate (such as high debt, likely defaults and vulnerable asset price declines) is still gold-friendly. The risk now is whether the pandemic worsens and how quickly a vaccine can be made available – assuming it does provide protection from covid-19,” HSBC analysts say.
“The fiscal and monetary response to the pandemic globally will remain highly accommodative. A Democratic administration with the commensurate likelihood of bigger fiscal stimulus packages to come will likely buoy gold.
“All this should continue to provide gold with a reason to go higher in the medium to longer-term.”