Goldman Sachs Bearish on Gold Price Outlook in the Short-Term
Geopolitical and economic risks are easing and with them the price of gold, say Goldman Sachs, in a recently published note to clients.
“Looking ahead, we expect that gold will come under pressure this week, and over the next three months, with a near-term target of $1,200/oz. In fact, this week is likely to see some significant bearish catalysts materialise in our base case,” said Goldman’s Max Layton.
Gold is an international safe-haven par excellence, so it tends to outperform when there is a crisis, however, the success of Emmanuelle Macron in the first round of the French Presidential election has eased fears that France could leave the EU, leading to pullback in gold.
There is arguably an even stronger relationship between gold and US interest rates – or ‘real rates’ to be specific – which are interest rates minus inflation.
The relationship is inverted - so rising interest rates tend to be accompanied by falling gold prices and vice versa.
The Federal Reserve (Fed) set interest rates so their influencers are also influencers of gold.
A federal tax cut announcement expected on Wednesday, April 26 could influence the timing of the next interest rate hike by the Fed and therefore the price of gold.
Despite the difficulty the President had with repealing the affordable care act, Goldman, unlike some other banks, do not see this as indicative but rather a one off due to the sensitive political nature of the bill.
“Our economists think the read-across from the failure of health care reform is limited. It is politically much easier to deliver a net benefit to the electorate viatax cuts than to take away health care coverage,” said Goldmans.
“Thus, we still see a tax cut of around 1% of GDP as likely. Announcement of the tax bill on Wednesday could be a catalyst to reprice market expectations,” added Layton.
In a potentially critical week for the precious metal, Layton sees the potential for even more downside pressure:
“Another catalyst for repricing of US rates and gold price could be strong data prints on Friday. We expect US GDP and personal consumption numbers to come out on Friday to be 1.4% and 1.3% respectively, stronger than consensus of 1.1% and 0.9%.”
Data is currently positive and outperforming falling market rate hike expectations, this suggests expectations may currently be under-priced and might potentially rise – leading to higher real rates and lower gold.
Another consideration is that Chinese buying has traditionally supported gold at 1200/oz.
Downside risks could come from military tensions in North Korea or slower growth.
“The main risks to this bearish near-term outlook are, in our view, increased military tensions in North Korea and slower-than-anticipated US (and global) growth; however, these developments are not our base case.”
12-Month View “Agnostic”
On a 12-month view Goldman are "agnostic" about gold.
“Our primary commodity view is one of a stronger cyclical backdrop; and how the Fed responds to this environment, and hence the path real interest rates follow, is still uncertain. Accordingly, we maintain our 12-month target at $1250/toz,” said Layton.
They are biased to being constructive based on the ‘higher purchasing power of EM’s.
“We believe that one of the main reasons the gold price increased since 2000 was the increase in the dollar purchasing power of emerging market economies (and in particular emerging Asia) which have a high propensity to purchase gold. After falling sharply between 2013-16, our economists expect emerging market $GDP growth to accelerate in the 2017-2020 period.
Meanwhile, we believe that the appreciation of emerging Asia currencies relative to the dollar was one of the factors which supported the gold price this year,” said Goldman.
