In a report published Friday, the investment bank said that it is maintaining its 2021 gold price target of $US2,300 an ounce as the global economy returns to balance between positive news of potential vaccines for the COVID-19 virus and the still prevalent risks of further economic damage from more waves of the virus.
Gold prices ended Friday on Comex up around 0.7% at $US1,886.20, down 3.2% for the week as the rotation out of megatechs and similar stocks continued.
Gold investors ignored the rise in US bond yields over the week – although they eased to 0.895% on Friday after touching a high of 0.97% earlier in the wake in the wake of the switch in investing triggered by news about the Pfizer COVID-19 vaccine.
Although Goldman Sachs economists see a strong economic recovery in the US and worldwide next year, 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. (Emerging Markets) 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.”
In the short-term, gold prices could continue to consolidate sideways, as “it may be difficult for gold to generate meaningful momentum in either a higher or lower direction,” Goldman said.
But in the longer-term, gold “should benefit from continued strong investment demand.”
Investment demand this year has been hit and the real drivers of price growth has been ETFs which seem to be the preferred vehicles for most investors.
The purchases by ETF’s has support gold for more than a year as central bank purchases soared, then slowed (in the September quarter in particular), demand from China and India has slowed sharply (especially for jewellery) because of record prices, and
The Goldman Sachs analysts said that the drivers of gold next year, investors should continue to watch real bond yields, which includes inflation. 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 (That’s a bond with inflation built into the yield).
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.
But they could also be waiting for a while because there are few, if any inflation drivers active across the world.
Energy costs are weak, wage growth, a non-event. If you look at China falling pork prices could very well drag consumer inflation negative, where it would join producer prices which have been in a state of deflation for much of this year. The COVID-19 impact continues, the new case loads in Europe and the US will damage activity and drive inflation lower for much of 2021.
Goldman expects the falling US dollar to continue to weaken into 2021, which should help support gold prices.
“A breakdown in the correlation of gold and long term real rates has been pretty common with its correlation switching to the dollar and other commodities during these breakdown periods,” Goldman explained.
“The breakdown of negative gold price changes and real rates correlation typically happens when the positive rates-dollar correlation disappears. This is the environment which our FX and rates strategists expect in 2021,” Goldman said.
Finally, silver seems to be still more attractive to smaller investors because it is perceived as being cheaper (which it is) and prices around $US24 an ounce seem easier for investors to grasp than gold above $US1,800 an ounce.
Meanwhile Comex silver rose 1.8% on Friday to end at $US24.77, down 3.6% for the week.
Comex copper ended close to $US3.18 ($US3.1780) for a gain of around 1% for the day and the week.
Iron ore prices fell on Friday but ended the week higher.
The price of 62% Fe fines delivered to northern China fell $US1.37 to end at $US122.37, up around 3% from $US117.80 the previous Friday.
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