Goldman Sachs turned positive on gold
Goldman Sachs (GS) has turned positive on gold (GLD) for the first time in more than five years. As reported by CNBC, Goldman Sachs noted on March 26 that it expects gold prices to “outperform” in the coming months. The main reasons cited by the team of analysts, led by Eugene King, for the bullish gold price forecast follow:
- an uptick in inflation
- the increased risk of a stock market correction
The Goldman Sachs team noted, “Our commodities team believes that the dislocation between the gold prices and U.S. rates is here to say.”
The team added that based on the empirical data for the past six tightening cycles, gold has outperformed after four rate hikes.
The Federal Reserve increased its interest rate by 25 basis points during its March 2018 meeting. The Fed has hinted at two more hikes this year, which is in line with its original forecast. At least one more hike was added in the following two years.
However, Goldman Sachs is forecasting four hikes in 2018 against the Fed’s base case of three hikes. Because gold doesn’t offer any yields in terms of income, its appeal as a holding would decline in a rising interest rate scenario. Under such circumstances, Goldman Sachs’ bullish view on gold prices despite its forecast of four rate hikes in 2018 might seem counterintuitive.
Gold to shine
Goldman Sachs pointed out that taking a cue from the past tightening cycles, there are reasons to be optimistic about gold. The volatility in the markets has already started increasing, and the stock markets declined after increased fears of trade wars. A further sell-off in the stock markets would be beneficial for gold.
Gold and stocks such as Pan American Silver (PAAS), B2Gold (BTG), Agnico Eagle Mines (AEM), and Yamana Gold (AUY) are driven by economic data and uncertainty. Together, PAAS, BTG, AEM, and AUY comprise 10.1% of the VanEck Vectors Gold Miners ETF (GDX).
In this series, we’ll discuss each of the factors outlined by Goldman Sachs, including inflation and stock market corrections. We’ll also see what other analysts predict for gold prices going forward. In the next part of this series, we’ll see which stocks Goldman Sachs recommends to play its positive stance on gold prices.