Change Comes Just Weeks After Initial Forecast
Goldman Sachs is among the latest to go long gold amid a re-emergence of interest in defensive assets. A few weeks ago, the bank updated its gold forecast for 2019, from $1,350 to $1,425, citing risk aversion as the primary reason.
Now, in a more recent interview, Goldman's global head of commodities research Jeffrey Currie reiterated the bank's forecast with an upgrade. According to Currie, fears that another recession is around the corner could be a key driver behind gold's outperformance this year.
Although the markets, for the most part, retain the image of stability, numerous analysts have stated that a crisis could be brewing. The threat of stagnant growth in both the U.S. and Europe is ever-looming, and central bank policies have likewise done much to reinforce concerns.
Many have pointed out that nearly every U.S. hiking cycle has ended in a recession, and the Federal Reserve now appears to be slowly putting the wrap on a tightening cycle that started in 2015. The Fed appears to have been rushed along by equity downturns and other red flags, which are a recessionary concern of their own. To top it off, numerous central banks around the world are aiming to tighten monetary policy in the near future.
Currie highlighted the recent central bank bullion purchases, noting that the resulting "wealth effect" is enough to push gold prices to $1,425. Last year, the Indian government took cues from its people as it re-entered the gold market with a 70-ton purchase. Chinese bullion buying is also expected to intensify moving forward.
This is on top of standard buyers like Russia, Kazakhstan and Turkey, whose regular purchases act as perpetual support for gold prices. Bart Melek, head of global strategy at TD Securities, said that central bank gold holdings grew by 3,900 tons, or 13%, since 2009. The forecast that reserves will expand by another 800 tons in the next two years could push gold past the already-bullish expectations, said the strategist.
In his report, Melek explained that central banks are looking to diversify away from the U.S. dollar as the global market faces the prospect of another superpower in China. Melek thinks India's economy is another one to look out for, and the strategist believes the densely-populated nation could soon become a major player on the global scene.
Currie said that rising geopolitical tensions are another reason why central banks are looking for protection. Out of the various flare-ups, the U.S.-China trade standoff could prove to be the most beneficial for bullion due to the inflationary implications of the conflict.
Goldman's stance that long gold is the best commodity play is unsurprising, as the metal continues to outperform both equities and other commodities. Building up on the bank's previous forecast of $1,425 an ounce, Currie now sees gold reaching $1,450 sometime this year.
