Goldman Sachs Revises Its Gold Forecast Upwards

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.

Analysts Say Gold Poised to End Year on a High Note

Gold expected to do well in the last few months of the year with more upside potential in 2019. 

Having gained 3.5% over the previous week, gold seems poised to end the year on a high note after two mild quarters says CNBC. The CNBC article writes that different analysts expect the metal to do well in the last few months of the year before moving on to post a strong performance in 2019.

Jim Steel, chief precious metals analyst at HSBC, attributes gold's performance this year to an overbearing dollar which, along with higher-yielding Treasury notes, diverted some safe-haven demand away from the yellow metal. According to CNBC, Steel said gold was severely oversold below the $1,200 level, as it recently had the largest amount of shorts since 2001. He explained that dips such as these are bound to attract bullion investors, especially those in Asia.

Steel noted that bearish sentiment among speculators created an excessive short position that could ultimately act as strong support if sellers end up having to cover their bets due to higher prices.

Although a pick-up in physical demand in emerging markets played an important role in the price spike, Steel thinks the concerning equity picture is what really placed gold back into the spotlight reports the article. The S&P 500 index notched major daily losses in back-to-back weeks as investors grew increasingly worried over tensions between the U.S. and China, shaky emerging markets and economic issues brewing in the eurozone.

According to CNBC, the Fed's assurance that rate hikes would continue into the new year was another source of concern, with some feeling that the central bank is too eager to tighten. But Bart Melek, head of commodities strategy at TD Securities, believes the Fed might not follow through with its intent to raise the funds rate above 3% by the end of 2019. In particular, he says the Fed could be dissuaded from tightening by additional flare-ups in the stock market.

Melek noted that a drop in the 10-year yield from above 3.25% to 3.15% also helped gold take back safe haven demand. A loss of faith in the dollar's long-term picture could further strengthen gold's case in the near future.

The strategist sees gold holding onto its gains as the year comes to a close, expecting an average of $1,225 for this quarter. From there, Melek thinks the metal will average $1,325 an ounce by the fourth quarter of 2019.

HSBC predicts that the metal will average $1,274 an ounce this year with plenty of upside potential in 2019. Steel pointed to record volatility that the markets suffered from earlier in the year, which brought the metal to $1,360 an ounce. According to CNBC, he expects the markets to slip back into turbulence again, cementing gold's long-term position and giving way to ample short covering among speculators.