Gold to Drop Even Further as Fed Increases Real Rates: Goldman SachsVW Staff
Goldman Sachs had a ‘famous’ short recommendation on Gold as the precious metal was trading in the $1500 an ounce range. Now with the precious metal trading as low as $1300, Goldman thinks it could go near the 3 digit territory. Further details below.
Hawkish FOMC pushes gold below $1,300/toz The gold sell-off has re-accelerated with the hawkish June FOMC pushing prices to $1,280/toz. This latest move has tracked the sharp decline in US real rates triggered by the re-pricing of Fed easing policies, in stark contrast to the April sell-off which had occurred with range-bound US real rates. Our modeling suggests that the decline in gold prices since early May is consistent with the higher level of real rates and the steady ETF outflow.
Uncertain near-term outlook for gold prices…
Although we expect that gold prices will decline further, the near-term outlook remains uncertain. While a continuation of the re-pricing of Fed policies across assets seems the path of least resistance and would push gold prices lower, the magnitude of this re-pricing has been significant and assumes an earlier tapering of QE3 and hike in the Fed fund rate than our economists expect. Net, while the realization of their forecast would limit the downside to gold prices near term, the momentum in gold prices leaves risk to current prices as skewed to the downside. Given these diverging forces, we are marking our forecast to market (real rate and ETF) and lowering our year-end 2013 forecast from $1,435/toz to $1,300/toz.
… but expecting gold prices to decline further in the medium term
Medium term, we expect that gold prices will decline further given our US economists’ forecast for improving economic activity and a less accommodative monetary policy stance. Further, with QE tapering likely to start soon, perhaps even a bit sooner than previously anticipated, we are fast forwarding on our real rate path and now expect 10-year TIPS yields to reach 1% by year-end 2014 vs. 0.5% previously. In addition, assuming that the decline in ETF holdings continues at twice the pace that we had previously expected brings our 2014 year-end forecast from $1,270/toz to $1,050/toz. Importantly, we continue to expect that continued central bank gold buying will not be sufficient to offset this decline in prices.
Further, we expect this decline in prices to coincide with rising jewelry/retail demand, which we view as price responsive and not price setting. Finally, while this forecast implies that the unwind of physical gold investments will push gold prices below its marginal cost of production, we expect that the ensuing likely decline in mined output will over the longer term maintain prices near $1,200/toz , which remains our forecast for 2015 and beyond.