Goldman Sachs is upbeat about gold prices, looking for the metal to draw support from emerging-market demand and rise to around $1,425 in 12 months.
In a research report late Monday, Goldman was bullish on commodities generally due to easier monetary conditions, calling for a 10% three-month return on the S&P Goldman Sachs Index and a 9% return on a 12-month basis.
“In our view, risks are starting to shift to the upside, particularly in emerging markets,” Goldman said. “Unlike last year, the Fed is on hold, interest rates are lower and oil prices are weaker, all combining for easier financial conditions than last summer/fall. In addition, during the past several weeks, policymakers have demonstrated a willingness to underwrite any demand weakness stemming from trade-war concerns.”
Gold has climbed by around 5% since late May, helped by worries about a trade war and disappointments in U.S. economic data, the investment bank said. Bullish speculative positioning in the futures market has increased as yields on U.S. 10-year Treasury notes fell, and investors have been returning to gold-backed exchange-traded funds.
“While U.S. investment demand has room to rise further if U.S. growth were to continue to underperform, we see rising physical EM demand as a more predictable and persistent bullish driver of gold prices,” Goldman said.
Analysts pointed out that India posted a 50% year-over-year increase in May gold imports. Meanwhile, the Shanghai gold premium “has held up well,” pointing to healthy onshore demand undeterred by the rise in yuan-denominated gold prices, Goldman continued.
“Strong EM demand is likely due to a mix of rising dollar purchasing power, trade war-related hedging and speculative buying as [the] gold price in local currencies has begun to display momentum,” Goldman said. “At the same time, EM central-bank purchases continued to accelerate, driven by a mixture of geopolitical tensions and diversification motives.”
Over the past two months, China’s central bank has upped its gold purchase rate by almost 50% to 15 tonnes per month, while the Philippines’ central bank just announced plans to buy up to 30 tonnes of gold per year, Goldman said. Meanwhile, Goldman continued, purchases by longtime buyers Russia and Kazakhstan “show no signs of fading.”
Goldman listed three- and six-month targets of $1,350 an ounce and a one-year target of $1,425. For silver, the bank listed targets of $15 for three and six months, then $16 in 12 months. As of 9:24 a.m. EDT, spot gold was $12.40 higher to $1,351.30 an ounce, while silver was 12 cents higher at $14.94.
Analysts look for silver to follow gold higher.
“Silver has rallied in line with the increase in the price of gold, on the back of rising investor fear,” Goldman said. “Yet, despite the rally, silver continues to underperform gold. This in our view is due to a combination of factors including absence of central-bank purchases of silver, weak industrial demand and growth in silver mine supply.
“All in all, for silver to outperform gold, one needs further deterioration in risk sentiment akin to early 2016 or late last year. That would lead to a stronger investor push into precious metals, which may benefit silver more than gold given how cheap it is right now.”