Here's Why Goldman Sachs Is Staying Long Gold
Source: Eric McWhinnie, Wall St. Cheat Sheet (11/16/11)
"'We expect U.S. real interest rates to remain lower for longer, supporting higher gold prices through 2012.'"
The report by Goldman states, "We expect gold prices to continue to climb in 2011 given the current low level of U.S. real interest rates. Further, with our U.S. economics team now forecasting slower U.S. economic growth in 2011 and 2012, we expect U.S. real interest rates to remain lower for longer, supporting higher gold prices through 2012." The bank also said that the ongoing debt crisis in the euro zone is "skewing the balance of risks to higher gold prices." Ben Bernanke has already pledged to keep interest rates at all-time lows for at least mid-2013. Furthermore, the Federal Reserve recently slashed its economic growth projections for 2012. Fed officials now expect the U.S. economy to grow by 2.5%-2.9% next year, down from previous projections of 3.3%-3.7% made in June.
What strategy is the bank employing to take advantage of the current economic situation? Goldman says, "With expiration approaching, we are rolling our outstanding long Dec-11 COMEX gold trade recommendation, entered on October 11, 2010 with an initial value of $1,364.2/toz and a current gain of $423.9/toz, into a long Dec-12 COMEX gold future position with a reference price of $1,800.5/toz." Translation, Goldman was bullish on gold for 2011, and continues to be bullish on gold for 2012.
The report also gives a short-term price forecast. For gold, the bank increased its three-month forecast by 7.0% to $1,760 a troy ounce from $1,645/oz, its six-month forecast by 5.8% to $1,830/oz from $1,730/oz, and its 12-month forecast by 3.8% to $1,930/oz from $1,860/oz. Credit Suisse has also said that gold may climb over $1,800 in the coming days due to negative real interest rates as the key driver. However, with the Fed's low interest rate pledge, negative real interest rates are likely to remain for a number of years. Given this, many expect gold prices to climb above $2,000 per ounce. Dr. Walter de Wet, the Head of Commodity Research at Standard Bank in London, expects gold to hit $2,200 at the end of the first quarter next year. He believes more quantitative easing is on the way for Europe and the U.S., and does not see the Fed stopping its expanding balance sheet for another three or four years. Standard Bank predicts that $500 billion of QE3 will add $200 to the gold price early next year.
In the middle of Goldman's report is a very telling sentence that aligns the interests of Goldman Sachs and Standard Bank. Goldman says, "Given our U.S. economists' cautious economic outlook and the significant downside risks associated with the European turmoil, additional Fed easing might well be needed." While the fundamental reasons for precious metals remain strong, Goldman going long on gold may also be a bet on QE3.
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