In a report published Friday, the investment bank said that it is maintaining its 2021 gold price target of $2,300 an ounce as the global economy balances between positive news of potential vaccines for the COVID-19 virus and the near-term risks of further economic devastation.
Although Goldman Sachs economists are expecting to see a strong economic recovery in the U.S. and worldwide, commodity analysts Jeffrey Currie and Mikhail Sprogis, the authors of the gold report, said that there is still a “strong strategic case for gold.”
“In our view, the structural bull market for gold is not over and will resume next year as inflation expectations move higher, the U.S. dollar weakens and E.M. retail demand continues to recover,” the analysts said. “Near term, however, it may be difficult for gold to generate a meaningful momentum in either a higher or lower direction.”
As to what will drive gold prices higher next year, the analysts said that they continue to watch real bond yields, which includes inflation. Specifically, they said that a drop in real five-year yields will continue to support gold.
“Under our economist forecast (assuming our bullish oil forecast) short term U.S. real rates will average -2.1% over the next five years. Five-year tips yield is currently -1.2%, which implies material downside potential,” the analysts said.
Currie and Sprogis said that they are paying close attention to five-year bonds because this has the biggest impact on currency markets. As inflation rise, consumers can expect to see significant debasement in global currencies.
“We believe the bulk of gold purchases which happened this year were made by investors who were more concerned about the real purchasing power of the dollar vs. losses in their equity portfolios,” they said.
Goldman Sachs said that it also sees resurging emerging-market demand for gold in 2021.
“Chinese and Indian gold demand already displays signs of normalization. The Chinese and Indian gold premiums are gradually increasing and are almost back to pre-Covid levels. Biden’s election win and vaccine news should continue to push currencies of E.M. consumers higher as tariff risks are lower, supporting their purchasing power,” the analysts said.
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